Tiêu đề LM2 Asset Allocation to Alternative Investments IFT Notes.pdf ✅

LM2 Asset Allocation to Alternative Investments 2024 Level III Notes © IFT. All rights reserved 1 LM2 Asset Allocation to Alternative Investments 1. Introduction and the Role of Alternative Investments in a Multi-Asset Portfolio ..................3 The Role of Alternative Investments in a Multi-Asset Portfolio....................................................3 2. Diversifying Equity Risk ................................................................................................................................6 Volatility Reduction over the Short Time Horizon.............................................................................7 Risk of Not Meeting the Investment Goals over the Long Time Horizon...................................8 3. Traditional Approaches to Asset Classification................................................................................. 10 Traditional Approaches to Asset Classification................................................................................ 10 4. Risk-Based Approaches to Asset Classification................................................................................. 12 Illustration: Asset Allocation and Risk-Based Approaches.......................................................... 15 Comparing Risk-Based and Traditional Approaches ..................................................................... 16 5. Risk Considerations, Return Expectations, and Investment Vehicle......................................... 17 Risk Considerations..................................................................................................................................... 17 Return Expectations.................................................................................................................................... 17 Investment Vehicle ...................................................................................................................................... 18 6. Liquidity............................................................................................................................................................ 19 7. Fees and Expenses, Tax Considerations, and Other Considerations ......................................... 21 Tax Considerations ...................................................................................................................................... 21 Other Considerations.................................................................................................................................. 21 8. Suitability Considerations.......................................................................................................................... 23 Investment Horizon..................................................................................................................................... 24 Expertise.......................................................................................................................................................... 24 Governance ..................................................................................................................................................... 24 Transparency................................................................................................................................................. 24 9. Asset Allocation Approaches and Statistical Properties and Challenges................................. 26 Statistical Properties and Challenges of Asset Returns................................................................. 26 10. Monte Carlo Simulation............................................................................................................................ 28 11. Portfolio Optimization.............................................................................................................................. 34 12. Risk Factor-Based Optimization ........................................................................................................... 36 13. Liquidity Planning ...................................................................................................................................... 39 Achieving and Maintaining the Strategic Asset Allocation........................................................... 40
LM2 Asset Allocation to Alternative Investments 2024 Level III Notes © IFT. All rights reserved 2 14. Preparing for the Unexpected................................................................................................................ 43 Preparing for the Unexpected ................................................................................................................. 44 15. Monitoring the Investment Program .................................................................................................. 47 Overall Investment Program Monitoring............................................................................................ 47 Performance Evaluation............................................................................................................................ 48 Monitoring the Firm and the Investment Process........................................................................... 49 Summary ............................................................................................................................................................... 51 This document should be read in conjunction with the corresponding reading in the 2024 Level III CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright 2023, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights reserved. Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute. Version 1.0
LM2 Asset Allocation to Alternative Investments 2024 Level III Notes © IFT. All rights reserved 3 1. Introduction and the Role of Alternative Investments in a Multi-Asset Portfolio There is no universally accepted definition of ‘alternative’ investments. For this reading, alternative investments include the following asset classes: • Private equity • Hedge funds • Real assets • Commercial real estate • Private credit In this reading, we discuss the role of alternative investments in a multi-asset portfolio. We discuss the diversification benefits of alternative investments when added to a portfolio comprising of equities, consider the different ways to define an opportunity set, consider the suitability of alternative investments, discuss approaches to asset allocation when alternative investments are included, and the need for liquidity planning for alternative investments. Finally, we cover the unique monitoring requirements for alternative investments. The Role of Alternative Investments in a Multi-Asset Portfolio The major benefit of adding alternative investments to a traditional portfolio consisting of stocks and bonds is that they can increase the portfolio’s risk-adjusted return. Some alternative investments have a higher expected return (return enhancing), while others have an expected diversification benefit (risk reduction). Both these factors can help improve a portfolio’s risk-adjusted return. Exhibit 1 from the curriculum provides a framework of different types of alternative investments in the risk/reward continuum. At one end of the spectrum, real assets provide a diversification benefit and can help protect a portfolio from unexpected inflation. At the other end of the spectrum, private equity provides a higher expected return as compared to public equities.
LM2 Asset Allocation to Alternative Investments 2024 Level III Notes © IFT. All rights reserved 4 Investors can have different perspectives on risk reduction. For example, to reduce volatility, some large institutional investors may be interested in strategies that are non- correlated with their existing portfolio. They may add an alternative investment strategy which may be riskier on its own but offers low correlation to their investments. Other investors may be interested in reducing the ‘left tail’ risk associated with a stock portfolio and may seek alternative investments to achieve that objective. Asset classes in a portfolio can have different functional roles such as: capital growth, income generation, risk diversification, and/or safety. Exhibit 3 from the curriculum illustrates how different alternative investments are perceived to fulfill these roles. The Role of Private Equity in a Multi-Asset Portfolio • When added to a traditional portfolio, the main role of private equity is to enhance returns. This higher return expectation is based on the illiquidity risk associated with private equity investments.