Despite its acknowledged limitations, internal rate of return is used as the primary metric of success for investments made through limited partnerships, including venture capital, private equity, and more. Because there is no associated concept of risk to risk-adjust IRRs, investors have turned to other devices, such as quarterly averages of fund returns, PMEs (public market equivalents), and public market indices plus a rule-of-thumb premium (such as S&P 500 + 3%) as risk-adjusted benchmarks for return.  These approaches address some of the issues, but all are proxies for the real thing, with well-recognized faults and biases.

Alpha, beta, sigma – measured directly for alternative investments? The absence of these crucial measures, now must-haves for all public market investing, does not mean that they are logically impossible, but only that no one had yet conceived of a correct framework from which to measure them.

In two years of research and development, Sand Hill Econometrics has conquered the obstacles to build the first scientifically constructed index of value for venture capital. We have also developed a robust approach to measuring risk and risk-adjusted performance for all classes of alternative assets, not just venture capital.

The Sand Hill Index is based on data comprising the universe of venture capital, and built with state-of-the-art statistical methods. Unlike any other private equity benchmark, the Sand Hill Index is current, value-weighted, continuously invested, and without bias.  Investors can use it to measure the true economic risk and performance of their venture capital holdings and to assess their levels of diversification.

Our methods for measuring risk and performance of portfolios for all alternative assets essentially un-smooth, with econometric tools, the returns reported by general partners to recover the true, economic returns and measure their variance, covariances, and risk-adjusted performance (alpha).   We directly bring the tools introduced 40 years ago with the Capital Asset Pricing Model, now regarded as essential to professional asset allocation, to alternative assets. We believe that our index and measurement tools are powerful new developments for the private equity industry.

In addition to building an index of venture capital and tools for measuring risk and performance for all alternative assets, Sand Hill Econometrics has also built a database of venture investments that can address a wide array of research issues in venture investing. We produce reports based on research from this database on a regular basis and welcome custom research projects.

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Methodology

Related Links:
The Sand Hill Index of Venture
Sand Hill Papers
Discussion of Index Criteria