Harmful Diversification: Evidence from Alternative Investments

The British Accounting Review, Forthcoming

50 Pages Posted: 4 Feb 2017 Last revised: 15 Aug 2018

See all articles by Emmanouil Platanakis

Emmanouil Platanakis

University of Bath - School of Management

Athanasios Sakkas

University of Nottingham

Charles Sutcliffe

University of Reading - ICMA Centre

Date Written: August 14, 2018

Abstract

Alternative assets have become as important as equities and fixed income in the portfolios of major investors, and so their diversification properties are also important. However, adding five alternative assets (real estate, commodities, hedge funds, emerging markets and private equity) to equity and bond portfolios is shown to be harmful for US investors. We use 19 portfolio models, in conjunction with dummy variable regression, to demonstrate this harm over the 1997-2015 period. This finding is robust to different estimation periods, risk aversion levels, and the use of two regimes. Harmful diversification into alternatives is not primarily due to transactions costs or non-normality, but to estimation risk. This is larger for alternative assets, particularly during the credit crisis which accounts for the harmful diversification of real estate, private equity and emerging markets. Diversification into commodities, and to a lesser extent hedge funds, remains harmful even when the credit crisis is excluded.

Keywords: Alternative assets, diversification, estimation errors, transactions costs, non-normality, regimes

JEL Classification: G11

Suggested Citation

Platanakis, Emmanouil and Sakkas, Athanasios and Sutcliffe, Charles M., Harmful Diversification: Evidence from Alternative Investments (August 14, 2018). The British Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2911212 or http://dx.doi.org/10.2139/ssrn.2911212

Emmanouil Platanakis (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Athanasios Sakkas

University of Nottingham ( email )

Nottingham University Business School
Jubilee Campus
Nottingham, NG8 1BB
United Kingdom

Charles M. Sutcliffe

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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