The Role of Alternative Investments in Strategic Asset Allocation

This chapter introduces a framework for strategic asset allocation using alternative investments along with traditional investments. The approach accounts for time series biases with alternative asset indices. A strategic asset allocation model is used that is flexible enough to capture the risk-return profile adequately, as well as incorporate real investor preferences. The results show that bonds are highly important in all portfolios, but defensive portfolios tend to use stocks of large U.S. firms. In all portfolios, emerging markets gain in relevance with decreasing risk aversion. For alternative investments, all portfolios use the maximum allocation of hedge funds and a medium allocation of commodities. Private equity is comparatively more important in defensive portfolios, whereas real estate investment trusts (REITs) gain in importance as risk aversion decreases.