@article {Milevsky27, author = {Moshe Arye Milevsky}, title = {Illiquid Asset Allocation and Policy Weights}, volume = {7}, number = {3}, pages = {27--34}, year = {2004}, doi = {10.3905/jwm.2004.450957}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The author develops a simple approach for computing the probability that an initial asset allocation will breach a pre-specified policy weight over a given time horizon. The model is consistent with assumptions made in most Asset Liability Management (ALM) studies and the closed-form analytic expression {\textquotedblleft}buys{\textquotedblright} the user a variety of robust insights. After calibrating this model to broadly defined alternative investment asset class data, the author concludes that a conservative 5\% commitment to an illiquid asset class has a 1/3 chance of doubling (i.e., to 10\% of the fund) within 5 years, and tripling (i.e., to 15\% of the fund) within 15 years. Paradoxically, the lower the effective correlation between the performance of a given asset class and the remainder of the portfolio{\textemdash}which is normally something to be coveted in strategic asset allocation{\textemdash}the greater the chances of breaching a given policy weight. The results suggest that initial target allocations to illiquid asset classes should be reduced relative to their liquid counterparts, when a conventional mean-variance analysis was used to obtain these policy weights.}, issn = {1534-7524}, URL = {https://jwm.pm-research.com/content/7/3/27}, eprint = {https://jwm.pm-research.com/content/7/3/27.full.pdf}, journal = {The Journal of Wealth Management} }