Optimising Asset Allocation between Hedge Funds and Private Equity

This paper explores the optimisation of asset allocation within “alternative” investments, i.e. between private equity and hedge funds, as well as between private equity and public equities. It uses our proprietary Portfolio Blender tool. As a preliminary step before the optimisation, we compared the respective risk and return profiles of private equity and hedge funds to those of traditional assets. We compared private equity to public equities because of the equity component inherent to both asset classes, whereas we compared hedge funds to bonds because of their historical low level of volatility. Then, we used two complementary optimisation approaches: the first approach verifies the respective role of asset classes; the second one specifically addresses the question of optimising within constraints. Finally, and based on the results of both approaches, we made broad suggestions on how an investor could allocate between hedge funds and private equity, depending on what they expect from “alternative” investments