Research preview · institutional

PESU — shorting private-equity valuations

Generated 2026-08-20 with the open-source engine of the CSU paper.

The gap

Private equity holds roughly $13 trillion of assets whose reported valuations are appraisal-based: smoothed, lagged, and impossible to short. There is no native instrument to express a negative view — or to hedge an LP portfolio — on unlisted valuations. The PESU (Private Equity Short Unit) is a synthetic short with bounded loss on exactly that underlying: an OTC valuation derivative under an ISDA framework, for MiFID II professional investors only.

What makes it priceable

The engine of the CSU manuscript is reused with three adaptations specific to unlisted underlyings:

1. Appraisal smoothing. Reported NAV returns are AR(1)-smoothed; pricing uses Geltner-desmoothed economic dynamics, σ_true = σ_obs·√((1+φ)/(1−φ)) — about 2× the observed volatility at a typical φ = 0.6.
2. Genuinely discrete monitoring. The knock-out barrier is checked at quarterly NAV dates only; no continuity correction is applied because quarterly is the contract.
3. Reference-price risk. Settlement is against an AI reference valuation (ZKFL-PQ), not a traded price; the quote adds an explicit uncertainty loading ξ_ref·σ_ref on top of the Expected Shortfall tail margin.

Indicative pricing across PE regimes

One-year PESU, 15% barrier buffer, quarterly monitoring, per unit of reference NAV. Regime anchors, not calibrations.

Same engine, audited in public

Every component — Bates SVJ simulation, barrier treatment, POT/GPD tail loading — is the one validated against closed forms in the CSU Lab and the open-source repository. The PESU layer (desmoothing, sparse monitoring, reference-price loading) ships with its own test suite.