Handbook of Finance: Investment Management and Financial Management

Chapter 53. Integrating Alternative Investments into the Asset Allocation Process

VINEET BUDHRAJA

Senior Research Analyst, Citi Alternative Investments

RUI J. P. DE FIGUEIREDO Jr., PhD

Associate Professor, Haas School of Business, University of California at Berkeley

JANGHOON KIM, CFA

Research Analyst, Citi Alternative Investments

RYAN MEREDITH, CFA, FFA

Senior Research Analyst, Citi Alternative Investments

Abstract: For most investors, a disciplined investment process begins with strategic asset allocation—determining how to allocate capital across broad classes of assets, such as cash, fixed income, and public equity. This fact has lead to over 50 years of theory and practice on how best to match investment objectives with broad traditional asset classes. The emergence of new asset choices as staples of many investment portfolios—such as private equity, private real estate, and hedge funds—has challenged traditional approaches to asset allocation. In particular, effective strategic asset allocation needs to account for the unique types of risk present in alternative investments.

Keywords: asset allocation, alternative investments, hedge funds, private equity, real estate, active management, liquidity, downside risk

Private equity, hedge funds, and real estate are evolving to become significant components of the portfolios of many investors. As allocations to alternative investments increase, investors must confront new and complicated portfolio questions. Unfortunately, the investment theory ...