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?
For the full version or more information, please contact Karen McQuiston, CFA.