Building Trust in Illiquid Markets: an AI-Powered Replication of Private Equity Funds

ArXiv ID: 2510.23201 “View on arXiv”

Authors: E. Benhamou, JJ. Ohana, B. Guez, E. Setrouk, T. Jacquot

Abstract

In response to growing demand for resilient and transparent financial instruments, we introduce a novel framework for replicating private equity (PE) performance using liquid, AI-enhanced strategies. Despite historically delivering robust returns, private equity’s inherent illiquidity and lack of transparency raise significant concerns regarding investor trust and systemic stability, particularly in periods of heightened market volatility. Our method uses advanced graphical models to decode liquid PE proxies and incorporates asymmetric risk adjustments that emulate private equity’s unique performance dynamics. The result is a liquid, scalable solution that aligns closely with traditional quarterly PE benchmarks like Cambridge Associates and Preqin. This approach enhances portfolio resilience and contributes to the ongoing discourse on safe asset innovation, supporting market stability and investor confidence.

Keywords:

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 6.0/10
• Quadrant: Holy Grail
• Why: The paper uses advanced graphical models and asymmetric risk adjustments, indicating high mathematical complexity. It is data/implementation-heavy, with backtest-ready comparisons to benchmarks like Cambridge Associates and Preqin, though specifics on data sources and code are not provided in the excerpt.

  flowchart TD
    A["Research Goal<br>Replicate PE returns with liquid assets"] --> B{"Data Inputs"}
    B --> C["Private Equity Benchmarks<br>Cambridge Associates, Preqin"]
    B --> D["Liquid Asset Proxies<br>e.g., Public Equities, Bonds"]
    C & D --> E["Methodology<br>AI Graphical Model & Asymmetric Risk Adj."]
    E --> F["Computational Process<br>Decode PE dynamics from proxies"]
    F --> G["Outcome<br>Liquid, scalable PE replication strategy"]
    G --> H["Key Findings<br>Aligns with PE benchmarks<br>Enhances portfolio resilience & trust"]