Reverse Asset Allocation: Alternatives At The Core

Reverse asset allocation takes into account the special characteristics of alternatives, which, unlike traditional assets, have shorter track records and therefore have less predictable risk/return characteristics.  Unlike traditional asset allocation, which puts equities at the core of the portfolio and then adds bonds, plus alternatives, to limit risk and improve efficiency, reverse asset allocation begins by finding the expected return from a desired allocation to a core group of alternative assets, and then adds bonds and equities to achieve the overall desired portfolio characteristics.

The paper, Reverse Asset Allocation: Alternatives At The Core,describes both the attractiveness of alternative assets and the degree of unpredictability associated with using alternatives in an asset allocation framework.  The attractiveness lies in the potential for obtaining a beta-based structural alpha from alternative asset classes and in the relatively low correlations between alternative and traditional asset classes. 

Reverse asset allocation provides a rationale and process for including alternatives in institutional portfolios, and suggests a logic for targeting the use of alternatives to reflect both the markets' level of experience in these assets and some of their special characteristics.  It is a unique approach for institutions seeking ways to direct a commitment to alternative assets in order to gain broader exposure while managing risk.

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