CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures
Which of the following is the most likely reason investors accept an illiquidity premium when investing in a private equity fund?
Investors accept an illiquidity premium because their capital is locked up for many years and cannot easily be sold at a known price. The extra expected return compensates for this lack of liquidity; private funds offer no return guarantee and still carry valuation risk.
- AFund managers guarantee a minimum return
- BCapital is committed for years and cannot be sold easilyCorrect
- CPrivate funds are legally exempt from all valuation risk
Explanation
The illiquidity premium compensates investors for being unable to exit quickly or at a known price. Guarantees and exemption from valuation risk do not exist for such funds.
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