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Strategic Asset Allocation and the Role of Alternative Investments

Authors


  • We are very grateful to an anonymous referee for many helpful comments and to the editor John Doukas for very useful suggestions. Moreover, the paper has benefitted from comments by Greg N. Gregoriou, Dieter G. Kaiser, Harry M. Kat, Lutz Johanning, Christian Koziol, Rainer Lauterbach, Michael McDonald, Mark Mietzner, Juliane Proelss, and Maximilian Trossbach as well as the participants of the EFM Alternative Investments Conference 2011 (Toronto), International Business Research Conference (8th Annual Meeting, Dubai), European Financial Management Association (17th Annual Meeting, Athena), Campus for Finance 2009 (Vallendar), and Midwest Finance Association (58th Annual Meeting, Chicago) for helpful comments and suggestions. All remaining errors are our own.

Abstract

We introduce a framework for strategic asset allocation with alternative investments. Our framework uses a quantifiable risk preference parameter, λ, instead of a utility function. We account for higher moments of the return distributions and approximate best-fit distributions. Thus, we replace the empirical return distributions with two normal distributions. We then use these in the strategic asset allocation. Our framework yields better results than Markowitz's framework. Furthermore, our framework better manages regime switches that occur during crises. To test the robustness of our results, we use a battery of robustness checks and find stable results.

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