Strategic Asset Allocation and the Role of Alternative Investments

Douglas Cumming, Lars Helge Haß and Denis Schweizer

European Financial Management, 2014, vol. 20, issue 3, 521-547

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.

Date: 2014
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