Many investors are comfortable with the notion of segmenting their portfolios into liquid and illiquid buckets. But what is the optimal illiquid-liquid asset mix for a long-horizon investor? PGIM's IAS group has developed a simulation-based asset allocation framework designed to help CIOs make more informed decisions concerning their strategic investments in illiquid private assets. This framework can be customized to incorporate:
- Liquidity requirements
- Risk-return assumptions
- Time horizon
- Confidence level
Specifically, our model can help to address the following investor questions:
- What is the optimal allocation between liquid and illiquid assets?
- What is the cost of the investor's liquidity constraint?
- What is the marginal cost of increased liquidation certainty?
- How does the illiquid-liquid asset allocation decision affect the allocation within the liquid asset portfolio?
- How do other factors (e.g., the magnitude of any illiquid asset return advantage, the sensitivity of liquidation requirements) impact the allocation results?