The role of less liquid assets in a DB portfolio

While constructing an asset allocation for a corporate defined benefit (DB) pension plan, the emphasis is often placed on the allocation between the return-seeking portfolio and fixed income, along with the construction of the fixed income portfolio, particularly its ability to hedge pension liabilities. However, it is also important to ensure that the return-seeking portfolio is constructed in a manner that can achieve its targeted return with appropriate levels of risk and diversification.

In this paper, we focus the discussion on less liquid opportunities such as hedge funds, private real estate and private markets by first addressing the opportunities that they bring and then discussing how a plan’s profile, time horizon and liquidity constraints impact the recommended allocation.

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