Incorporating Uncertainty About Alternative Assets in Strategic Pension Fund Asset Allocation
10 Pages Posted: 16 Jun 2008
There are 2 versions of this paper
Incorporating Uncertainty About Alternative Assets in Strategic Pension Fund Asset Allocation
Incorporating Uncertainty about Alternative Assets in Strategic Pension Fund Asset Allocation
Date Written: November 2007
Abstract
We present an asset allocation framework for pension funds in which they can take pension liability risk and uncertainty about future expected asset returns explicitly into account. This framework recognized the liability hedging properties of assets that correlate positively with changes in the market value of pension liabilities. In addition, uncertainty about the expected returns, especially on alternative asset classes can be taken into account to arrive at realistic and acceptable asset allocations compared with standard portfolio optimization models. The empirical examples for pension funds in the United Kingdom indicate that for modest assumptions on expected returns of alternative assets ranging between 2 and 3 per cent above pension liabilities, the optimal portfolio allocation to alternatives ranges between 15 and 30 per cent.
Keywords: Alternative investments, Asset allocation, Liability driven investing; Robust optimization; Uncertainty
JEL Classification: G11, G22, G23
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Steven N. Kaplan and Per Strömberg
-
By Steven N. Kaplan and Per Strömberg
-
Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets
By Ronald J. Gilson and Bernard S. Black
-
Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations
By Paul A. Gompers and Josh Lerner
-
Private Equity Performance: Returns, Persistence and Capital Flows
-
Private Equity Performance: Returns, Persistence and Capital
-
The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
-
Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
By Thomas F. Hellmann and Manju Puri