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Optimising asset allocation across private equity segments - An “expected shortfall” approach

Author: Alexandre Falin; Vice President, Private Equity Mandates
Date: December 2011

Private equity is commonly perceived as a single and cohesive asset class. However, investing blindly in private equity without taking into account the specificities of investment stages and geographies may result in sub-optimal portfolios. And the very nature of private equity as an asset class makes it difficult to rebalance portfolios later on. This paper seeks to define an optimal allocation across the main private equity segments in order to assist investors in building an appropriate long term strategic asset allocation within private equity. We start by analysing the results of a quantitatively optimised asset allocation, based solely on risk/return considerations and using the expected shortfall as a risk proxy. We then examine how  qualitative adjustments can further improve the allocation. Finally, we conclude on a range of optimal portfolios assuming different levels of risk tolerance, return expectations and selection capability.



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