Practical Applications of Asset Allocation Implications of Illiquid Assets

Abstract

In <b><i>Asset Allocation Implications of Illiquid Assets</i></b>, from the August 2022 issue of <b><i>The Journal of Investing</i></b>, authors Tony Berrada, Olivier Scaillet (both of the <b>University of Geneva</b>), and Zhicheng Zhang (of <b>Geneva Institute of Wealth Management</b>) find that when investing in the global market, reallocating 20% of a stock-and-bond portfolio to privately traded illiquid assets significantly improves portfolio returns. In emerging markets, reallocating to publicly and privately traded illiquid assets improves returns. Applying a conservative investment strategy designed to minimize volatility produces the highest returns of all. The authors examine whether institutional investors can benefit from reallocating a portion of stock-and-bond portfolios to illiquid assets. Given volatility in the stock market and low returns on bonds, illiquid assets like real estate, infrastructure, private equity, and hedge funds may potentially help improve diversification, if they can provide solid returns that are not strongly correlated with stocks and bonds. The study finds that from 1999 to 2017, most illiquid asset classes outperformed stocks and bonds, were less volatile than stocks, and were negatively correlated with bonds.