What is the main challenge in performance measurement for illiquid alternative investments like private equity?

Question: What is the main challenge in performance measurement for illiquid alternative investments like private equity?

Answer options:

• Daily market pricing is readily available, leading to high volatility. ✅ Accurate and frequent valuation is difficult due to the lack of secondary markets.
• Their returns are perfectly correlated with public equity markets.
• They are explicitly excluded from GIPS performance reporting.

Correct answer: Accurate and frequent valuation is difficult due to the lack of secondary markets.

Explanation: Illiquid alternative investments lack readily observable market prices, making accurate and frequent valuation challenging. Valuations often rely on models, appraisals, or infrequent transaction prices, which can introduce subjectivity and lag behind real-time economic changes.