A drawdown fund advertising 13.25 per cent does not beat an evergreen netting 8.64. It ties with it — because four fifths of the apparent advantage is a measurement choice.
Set an evergreen fund netting 8.64% beside a closed-ended fund advertising 16.99% and the choice looks obvious. It is not. On the measure the investor actually lives, the gap is 1.78 points, not 8.35 — and a drawdown fund needs to advertise only 13.25% to draw level.
Worked in full in The Evergreen Fund Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An evergreen fund offers redemption, and redemption has to be funded. A liquidity sleeve of 20% in short-dated paper is the ordinary answer.
| Weight | Return | |
|---|---|---|
| Private portfolio | 80% | 12.40% |
| Liquidity sleeve | 20% | 4.20% |
| Blended, before any fee | 100% | 10.76% |
The sleeve costs 164 basis points a year of gross return — 1.31 times the institutional management fee. It is the largest charge in the structure and nobody collects it. It is the price of the redemption option, paid whether or not the option is used.
| Institutional | Retail | |
|---|---|---|
| Blended gross return | 10.76% | 10.76% |
| Management fee | 1.25% | 1.75% |
| Operating costs | 0.35% | 0.35% |
| Distribution fee | — | 0.75% |
| Performance fee | 0.52% | 0.36% |
| Net to the investor | 8.64% | 7.55% |
| Gap | 109.4 bp |
The two share classes are 109 basis points apart, on the same portfolio. Any comparison that quotes “the evergreen” without saying which class is comparing something to nothing.
| Year | Called | Distributed |
|---|---|---|
| 0 | 20 | 0 |
| 1 | 25 | 0 |
| 2 | 25 | 0 |
| 3 | 20 | 0 |
| 4 | 10 | 15 |
| 5 | 0 | 26 |
| 6 | 0 | 42 |
| 7 | 0 | 48 |
| 8 | 0 | 44 |
| 9 | 0 | 34 |
| 10 | 0 | 21 |
| Total | 100 | 230 |
Called 100, distributed 230, 2.30× the money, an IRR of 16.99%. That is the tear sheet, and it is arithmetically correct.
The investor did not commit 100 at the start and get it back. They committed 100 and had to hold it available against calls that arrived over four years. The uncalled balance sat in the same short-dated paper the evergreen sleeve holds, earning 4.20%. That is not a criticism of the fund — it is what a commitment is.
| Measure | Closed-ended | Evergreen | Gap |
|---|---|---|---|
| Headline rate (called capital) | 16.99% | 8.64% | +8.35 pts |
| Rate on committed capital | 10.42% | 8.64% | +1.78 pts |
Terminal wealth on the whole commitment is 269.45, an annual rate of 10.42%. Set against the evergreen’s 8.64%, the honest gap is 1.78 points. 78.7% of the apparent advantage was never there — it was the difference between measuring the money that was called and measuring the money that was tied up.
Hold the call schedule and the shape of the distributions fixed and scale the outcome. The drawdown fund draws level with the evergreen at a multiple of 1.94× — terminal wealth 229.03 against 229.03 — and at that multiple its tear sheet reads 13.25%.
So the practical rule is this: a closed-ended fund quoting anything below about 13.3% is, on this call schedule and against this evergreen, the worse of the two — whatever the 8.3-point headline suggests.
| Public market equivalent | Value |
|---|---|
| On called capital — the conventional measure | 1.45× |
| On committed capital | 1.14× |
| The evergreen fund | 0.97× |
| Overstatement of the conventional measure | 0.31 turns |
The conventional PME compounds only called capital, so it carries the same omission as the headline IRR and overstates by 0.31 turns. On committed capital the drawdown fund returns 1.14× the index; the evergreen, 0.97× — below one.
An evergreen reports a standard deviation of 6.5%, computed from quarterly appraised values. Appraisals are autocorrelated — here at 0.45 — which smooths the series. Unsmoothing multiplies it by 1.6237, giving 10.55%: about three fifths more than the reported figure. (The first version of this article said 1.9938 and 12.96%, from a factor that squared the autocorrelation where it should not have.)
The Sharpe ratio falls from 0.683 to 0.421 — by exactly the unsmoothing factor, which it must, since the numerator does not move. A low reported volatility is the redemption option's second advertisement, and it is measurement, not risk.
One last figure for scale. If appraised values run 6% above eventual realisations, that optimism costs 67 basis points a year — 41% of the sleeve drag, and more than the operating costs of the institutional class.
Ask for the rate on committed capital before the rate on called capital. Any manager can produce it; the schedule is in their own reporting. The difference between the two is not a rounding error — here it is 6.57 points of annual return.
And when comparing an evergreen with a drawdown fund, hold the cash rate the same on both sides. The uncalled balance and the liquidity sleeve are the same asset doing the same job; letting one of them earn the fund's return and the other earn cash is how an eight-point gap becomes a two-point one, or the reverse.
This article is one calculation from The Evergreen Fund Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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