What are the risks of holding illiquid assets in investment portfolios and how can those risks be quantified and offset? The answer to these questions was provided by Mark Kritzman at AIMA Canada’s most recent luncheon. Kritzman is senior lecturer in finance at the MIT Sloan School of Management and serves as president and CEO of Windham Capital Management. He incorporates liquidity into an asset allocation framework to assess the risks and benefits of illiquid investments in portfolio construction. His analysis suggests that the historical liquidity premiums of many illiquid funds are insufficient to justify significant allocations to them, especially if investors employ multiple funds. He demonstrated how his framework approach can be used to determine the optimal allocation to illiquid assets, based on an investor’s specific situation, and how it can determine how much liquidity is worth to an individual investor.
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