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FRM Part I · FRM Exam Part I · Fund Management

Which feature best describes the J-curve effect in private equity fund returns?

The J-curve describes early negative net returns in a private equity fund because management fees and start-up costs are paid, and investments are held at cost or written down, before successful exits generate gains later in the fund's life.

  1. AEarly reported net returns are typically negative because fees and write-downs precede gains from portfolio exitsCorrect
  2. BReturns are highest in early years as companies are bought at discounts
  3. CReturns are unrelated to fund age because valuations are marked daily
  4. DReturns decline steadily in later years because of rising management fees

Explanation

Fees are charged and investments are often carried at cost or written down in early years while value creation and exits arrive later, so cumulative net returns dip and then rise. The other options contradict this pattern.

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