Understanding your fund investment: What is the J-curve?

Three takeaways: 

  • The J-curve describes the typical performance profile of an investment in a private fund. It reflects how a fund’s performance commonly appears negative soon after launching, before normalizing as the age of a fund increases and the portfolio matures.

  • Early on, when private funds start making investments, the accounting of even small expenses and fees can appear as dramatically negative performance; this performance is initially driven by costs related to the operations of the fund and generally reverse as more investments are made and the investments begin to generate income and/or appreciate in value.

  • New investors of private markets funds should be aware of the J-curve performance profile, especially when observing early returns of an investment. 

Investors should be aware that private market funds have a unique performance profile compared to other traditional investments. Typically, in the early stages of an investment fund, performance may appear as a steep loss followed by a dramatic recovery – the graphical representation of which is called a J-curve, as shown in the figure below.  Seasoned investors anticipate this performance profile – it’s often caused by operating expenses and management fees at the earlier stages of the fund and generally reverses as the fund makes more investments and the portfolio matures. 

To fully understand a J-curve performance profile, it’s worthwhile to first take a look at how a private market fund operates. The motivation of a fund investor is to invest in a strategy that provides diversified exposure to a portfolio of assets. At its onset however, these funds may not have yet acquired any assets and it might take 2-4 years before the portfolio is fully built. In these earlier stages, even small fees and expenses like accounting and administrative expenses –  important elements of the operations of a fund –  initially drive what could appear to be potentially large negative returns, potentially alarming newer investors. But over time, the relative size of those fees and expenses typically shrinks and the returns generated by the fund’s investments exceed the impact of the fund fees and expenses. At this point, the fund begins generating income and appreciation.


The incline on the J-curve reflects a reversal of this effect as investments begin to generate income and/or gains. As a result, generally performance begins to normalize and will in theory, inch toward investors’ original return expectations. 

The length of time an investment is showing negative returns within the J-curve can vary. 

Private funds begin to show positive returns once the portfolio of investments begins to generate income returns, or the appreciation exceeds fees and the fund’s operating expenses. 

For some strategies, like with private equity funds, the investments may not generate immediate income and it may be the policy of the manager of the fund to hold investments at the cost of those investments for a period of up to one year. During this time, before assets begin to be revalued and potentially appreciate, there may be a longer period of negative returns within the J-curve. We have seen funds show negative returns for as long as 18 to 24 months before investment returns more closely depict the fundamental performance of the investments in the portfolio. 

It’s important to note that because this is an expected performance profile based on known factors, many sponsors of funds have begun to employ various techniques to shorten, or even avoid outright, the J-curve.

Questions an investor can ask to help identify whether a fund is in the J-curve.

Our investments team at Yieldstreet has compiled a list of questions to help investors identify whether a fund is under the J-curve effect.  By asking these questions, they can quickly differentiate between return driven by on-going operations of a fund and return driven by asset performance within the fund.

– How long has the fund been operating?

– What is the size of the current portfolio and what is the expected size of the fund as the portfolio develops?

– Have the assets in the fund been recently acquired?

– Have the assets in the fund begun to generate income and appreciation?

– Are the assets performing according to plan? And were there any unexpected events that have occurred?o Is the negative performance caused by the performance of the assets or the values of the assets?

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

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