(Real Assets).
Pierre-Yves Mathonet is Head of Risk in the Private Equities Department of the Abu Dhabi Investment Authority. He is a permanent member of the EVCA's Risk Measurement Guidelines working group. He codirected the Certificate in Institutional Private Equity Investing (CIPEI) course held by the Oxford Saïd Business School's Private Equity Institute. Previously, he was the head of the private equity risk management division of the European Investment Fund (part of the European Investment Bank group), worked as an investment banker in the technology groups of Donaldson, Lufkin & Jenrette and Credit Suisse First Boston, and, earlier, for the audit and consulting departments of PricewaterhouseCoopers. Pierre-Yves has coauthored several books including Beyond the J Curve (2005, John Wiley & Sons) and J Curve Exposure (2007, John Wiley & Sons). He holds a Master of Science cum laude in Finance from London Business School and a Master of Science magna cum laude in Management from Solvay Business School in Brussels. He is also a Certified European Financial Analyst cum laude. Pierre-Yves Mathonet and Thomas Meyer are the primary authors of Chapters 7–9 and 11–13 (Private Equity and Venture Capital).
Thomas Meyer is partner and cofounder of LDS Partners, specializing in the development of investment strategies, portfolio management, cash-flow forecasting, and asset allocation models for real assets (private equity, infrastructure, real estate). Mr. Meyer was responsible for the creation of the European Investment Fund's risk management function and was a director of EVCA (now Invest Europe). He was the secretary of the EVCA Private Equity Risk Measurement Group, codirected the limited partner course delivered by the Private Equity Institute at the Saïd Business School, University of Oxford, that led to the EVCA-awarded CIPEI. He is a Shimomura Fellow of the Development Bank of Japan and was a visiting researcher at Hitotsubashi University in Tokyo. Other career stations include intelligence officer in the German Air Force and CFO of Allianz Asia Pacific in Singapore. Mr. Meyer has published several books on investment strategies and risk management for real assets. He has authored Private Equity Unchained (2015, Palgrave MacMillan) and is the coauthor of Beyond the J Curve (2005, John Wiley & Sons), J Curve Exposure (2007, John Wiley&Sons), and Mastering Illiquidity (2011, JohnWiley&Sons). Thomas Meyer and Pierre-Yves Mathonet are the primary authors of Chapters 7–9 and 11–13 (Private Equity and Venture Capital).
Putri Pascualy is a Partner and Managing Director at PAAMCO. She manages the firm's Long/Short Credit Portfolio and is the Portfolio Manager for custom portfolios for leading institutional investors. Ms. Pascualy leads the firm's investment efforts in corporate credit including high-yield bonds, bank loans, event-driven and opportunistic credit, distressed debt, and structured products. In addition to her research responsibilities, her expertise includes portfolio construction, structuring, and risk management of complex portfolios and investments throughout various market cycles. She graduated from UC Berkeley with a BA in Economics and an MBA from theHaas School of Business. Putri is also a frequent contributor to media outlets including the Wall Street Journal, Bloomberg and Bloomberg Television, U.S. News and World Report, Barron's, the Financial Times, and CNBC. She is the author of Investing in Credit Hedge Funds: An In-Depth Guide to Building Your Portfolio and Profiting from the Credit Market (2013, McGraw-Hill). She is the primary author of Chapter 29 (Hedge Funds: Credit Strategies).
Jason Scharfman is a Managing Partner of Corgentum Consulting, LLC. Corgentum is a specialty consulting firm that performs operational due diligence reviews and background investigations on fund managers of all types globally including hedge funds, private equity, and real estate funds. Mr. Scharfman is recognized as one of the leading experts in the field of operational due diligence and is the author of Hedge Fund Governance: Evaluating Oversight, Independence, and Conflicts (2014, Academic Press), Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation, and Documentation (2012, John Wiley & Sons) and Hedge Fund Operational Due Diligence: Understanding the Risks (2008, John Wiley & Sons). Before founding Corgentum, he oversaw the operational due diligence function for a $6 billion alternative investment allocation group called Graystone Research at Morgan Stanley. Prior to joining Morgan Stanley, he held positions at Lazard Asset Management, SPARX Investments and Research, and Thomson Financial. Mr. Scharfman received a BS in Finance with an additional major in Japanese from Carnegie Mellon University, anMBA in Finance from Baruch College's Zicklin School of Business, and a JD from St. John's School of Law. He is the primary author of Chapters 10 and 33 (Private Equity and Hedge Fund Operational Due Diligence).
Ed Szado is an Assistant Professor of Finance at Providence College and the Director of Research at the Institute for Global Asset and Risk Management. Dr. Szado earned a PhD in Finance from the Isenberg School of Management, University of Massachusetts–Amherst, an MBA from Tulane University, and a BComm from McMaster University. He has taught at Boston University, Clark University, Providence College, and the University of Massachusetts–Amherst. He is a former options trader and has worked extensively on asset allocation and risk managed investment programs. He was a founding coeditor of the Alternative Investment Analyst Review (AIAR) and currently a member of the editorial board of The Journal of Alternative Investments (JAI). He is a CFA Charter Holder and has consulted to the Options Industry Council, the Chicago Board Options Exchange, the Chartered Alternative Investment Analyst Association, and the Commodity Futures Trading Commission. He is the primary author of Chapters 22–24 (Commodities).
Part 1
Asset Allocation and Institutional Investors
CHAPTER 1
Asset Allocation Processes and the Mean-Variance Model
This is the first of two chapters discussing asset allocation, with a focus on the decision-making process of asset allocators who consider portfolios consisting of traditional as well as alternative asset classes. This chapter describes the basic steps of the asset allocation process followed by a typical asset allocator. The objectives and constraints that apply to different types of asset owners are presented, and the important features of strategic and tactical asset allocation approaches are discussed. The chapter then explains the mean-variance approach, which is the best-known quantitative approach to allocation. Finally, some important limitations of the mean-variance approach are discussed.
1.1 Importance of Asset Allocation
Asset allocation refers both to the process followed by a portfolio manager to determine the distribution of an investor's assets to various asset classes and to the resulting portfolio weights. The allocation is determined to meet one or more objectives subject to a set of constraints set by the investor or dictated by the markets. An objective might be to maximize the expected value of a portfolio at a certain date subject to a set of constraints either established by the investor, such as a maximum level of return volatility or a maximum exposure to certain sectors, or dictated by the markets, such as no short selling of certain assets and a minimum investment level demanded by hedge fund managers.
While asset allocation refers to composition of an investor's portfolio in terms of different asset classes, we define security selection as the process through which holdings within each asset class are determined. For example, the asset allocation process may suggest that 20 % of an investor's portfolio should be allocated to hedge funds, while security selection in this case is concerned with the hedge fund managers that are eventually selected for the investment purpose.
The importance of asset allocation versus security selection has