Strategic Asset Allocation and the Role of Alternative Investments

43 Pages Posted: 20 Mar 2008 Last revised: 14 May 2011

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Lars Helge Hass

Lancaster University - Management School; University of Iowa - Henry B. Tippie College of Business

Denis Schweizer

Concordia University

Abstract

This paper introduces a new framework for strategic asset allocation with alternative investments (buyouts, commodities, hedge funds, REITs, and venture capital). Our approach is not based on a utility function, but on an easily quantifiable risk preference parameter, λ. We account for higher moments of the return distributions within our optimization framework and approximate best-fit distributions. Thus, we replace the empirical return distributions, which are often skewed and/or exhibit excess kurtosis, with two normal distributions. We then use the estimated return distributions in the strategic asset allocation. Our results show in various out-of-sample analyses that our framework yields superior results compared to the Markowitz framework. Furthermore, our framework better manages regime switches, which tend to occur frequently during crises. To test our results for stability and robustness, we use, among other things time-varying correlation structures in the return distributions and weight restrictions for the asset classes.

Keywords: Alternative Investments, Asset Allocation, Asset Backed Securities, Buy Out, Commodities, Hedge Fund, Higher Moments, Private Equity, REITs, Venture Capital

JEL Classification: G2, G12, G31

Suggested Citation

Cumming, Douglas J. and Hass, Lars Helge and Schweizer, Denis, Strategic Asset Allocation and the Role of Alternative Investments. Available at SSRN: https://ssrn.com/abstract=1091093 or http://dx.doi.org/10.2139/ssrn.1091093

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Lars Helge Hass

Lancaster University - Management School ( email )

Department of Accounting and Finance
Lancaster, LA1 4YX
United Kingdom

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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