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Harmful Diversification: Evidence from Alternative Investments

Emmanouil Platanakis (), Athanasios Sakkas () and Charles Sutcliffe ()
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Emmanouil Platanakis: School of Management, University of Bath
Athanasios Sakkas: Southampton Business School, University of Southampton

ICMA Centre Discussion Papers in Finance from Henley Business School, Reading University

Abstract: Alternative assets have become as important as equities and fixed income in the portfolios of major investors, and so their diversification properties are also important. However, adding five alternative assets (real estate, commodities, hedge funds, emerging markets and private equity) to equity and bond portfolios is shown to be harmful for US investors. We use 19 portfolio models, in conjunction with dummy variable regression, to demonstrate this harm over the 1997-2015 period. This finding is robust to different estimation periods, risk aversion levels, and the use of two regimes. Harmful diversification into alternatives is not primarily due to transactions costs or non-normality, but to estimation risk. This is larger for alternative assets, particularly during the credit crisis which accounts for the harmful diversification of real estate, private equity and emerging markets. Diversification into commodities, and to a lesser extent hedge funds, remains harmful even when the credit crisis is excluded.

Keywords: portfolio theory; alternative assets; diversification; estimation errors; transactions costs; nonnormality; regimes; credit crisis (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-ore, nep-rmg and nep-upt
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Journal Article: Harmful diversification: Evidence from alternative investments (2019) Downloads
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