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Strategic Asset Allocation and the Role of Alternative Investments

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  • Douglas Cumming
  • Lars Helge Haß
  • Denis Schweizer

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.

Suggested Citation

  • Douglas Cumming & Lars Helge Haß & Denis Schweizer, 2014. "Strategic Asset Allocation and the Role of Alternative Investments," European Financial Management, European Financial Management Association, vol. 20(3), pages 521-547, June.
  • Handle: RePEc:bla:eufman:v:20:y:2014:i:3:p:521-547
    DOI: 10.1111/j.1468-036X.2012.00642.x
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    File URL: https://doi.org/10.1111/j.1468-036X.2012.00642.x
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    References listed on IDEAS

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