Explain why planning for liquidity is central when committing money to alternatives
The idea
Private funds draw committed capital over several years through capital calls and return it later as distributions, so the investor holds an unfunded commitment that must be paid on demand. If cash is short, the investor may have to sell liquid assets at bad prices or default on commitments. Liquidity planning models expected calls, distributions and valuations, often with a cash flow projection model such as the Takahashi–Alexander model, and uses a pacing plan to reach and maintain the target allocation. Investors often overcommit, since calls are spread out and distributions recycle cash. Stress tests should consider falling public markets, when calls may continue while distributions dry up. A trap is the denominator effect: when public assets fall, the private share rises above target.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Asset Allocation to Alternative Investments
- Explain what alternative investments contribute within a portfolio spanning several asset classes
- Contrast alternative assets with bonds as ways to reduce the risk of holding equities
- Contrast defining the opportunity set by traditional asset classes with defining it by risk factors, when alternatives are included
- Discuss what investors should assess when allocating to each kind of alternative investment
- Discuss how to judge whether alternative investments suit a given investor
- Discuss the methods available for setting the weight of alternatives in an asset allocation
- Discuss what to watch when overseeing an alternatives programme after it is in place