Integrating Alternative Investments into the Asset Allocation Process

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.