ALT R20 Flashcards
Role that alternatives play in multi-asset portfolios
Improves risk adjusted returns. Private equity and credit are seen as return enhancing, real assets as risk reducing, HFs could be either
Compare alternatives to bonds in terms of risk mitigation
Depends on time horizon.
Shorter term bonds have a lower correlation to equities.
Longer term bonds fail to achieve return objectives
Traditional and risk-based approaches to defining an opportunity set (using alternatives)
Traditional: based on asset class liquidity or performance expectations
Liquidity-based: Some alternatives are not very liquid, some are (REITs)
Expected performance: Depending on forecasts, private equity expected to outperform during high-growth economies, real assets when inflation is high
Risk Factor analysis
Important considerations when allocating to alternatives
In addition to risk, return and correlation, it is important to look at investment vehicles, liquidity, expenses/fees, taxes
Fund structure (limited partner)
Lock up period
Fund of Funds or in house
Suitability considerations in allocating to alternatives
Suitable for large investors with long term investment horizons, specialized knowledge needed, strong governance frameworks, comfort with lack of transparency
Approaches to asset allocation to alternatives
Monte carlo, mean-variance optimizaiton, risk factor based optimization
Be aware of smoothed data underestimating risk
Liquidity planning for alternatives
Investors need to meet their capital commitments. Use models to forecast and test sensitivities to project cash flow needs
Considerations in monitoring for alternatives
Must be monitored to see if stated goals are being met. Performance should be assessed relative to goals, not a benchmark.
Varied greatly by manager and style, be aware of style drift or misaligned interests
Some use a “multiple on invested capital” as a metric rather than IRR
