Amid a wave of investment product innovation over the last several decades, one critical element to investment success has been left behind: asset allocation models. Almost as if suspended in time, they are the same today as they were a half century ago. That’s when Nobel Laureate Harry Markowitz introduced the notion of the “efficient frontier”, which explored the trade-off between risk and return.
Back then, Elvis dominated the airwaves, and the efficient frontier signaled that the 60/40 portfolio—60% stocks and 40% bonds—was the optimal portfolio for most investors. Fast forward to today, most asset allocation for alternative investments still focuses on risk/return assumptions developed in 1952. Elvis has since left the building. Isn’t it time to update these one-dimensional models to capture the unique attributes of alternative investments, like illiquidity?