We believe that in order to achieve superior risk adjusted returns our clients need to focus on the asset allocation decision as much as on the manager selection or securities selection decision.
Our approach to the asset allocation process is primarily quantitative. We bring a public markets discipline, econometric tools, proprietary databases and statistical models to simulate and predict expected returns across the entire private equity sub-asset class.
Optimal asset allocation has always been a challenge for developing Private Equity portfolios. The primary reason for this is
information asymmetry and source data bias. Given the absence of reporting transparency returns data tends to suffer from:
- Stale pricing and valuation bias
- Self reporting bias
- Survival bias
- Instant history bias
- Differences in reporting returns conventions bias
- Limited performance history bias
Cambridge Alternative Investments has taken publicly available returns databases and used filters to scrub this data to create a sanitized version of available information. We use proprietary tools to build customized alternative asset allocation models so that client portfolios are closer to the efficient frontier.
Portfolio Flexibility:
Our approach provides for tremendous flexibility in portfolio design in terms of:
- Allocation across a wide variety of private equity classes including primary, secondary, co investments, mezzanine, distressed investments and foreign funds
- Allowing for special conditions such as excluding certain funds or sectors or geographies
- Managing commitments, draw downs, distributions, reinvestments and interim risk
- Altering portfolio risk characteristics and active portfolio management
Systematic Approach:
We follow a systematic top down process for asset allocation. We combine macroeconomic information and business cycle judgment as well as rational assumptions with our proprietary private funds performance models.
We begin with carrying out a macro economic analysis where we analyze, inter alia, country and geographical outlook, sectoral performance and trends, industry attractiveness and broad asset class outlook. These considerations feed into our asset allocation models.
We use proprietary models for arriving at multi-period, multi-dimensional stochastic cash flow forecasting approaches. This helps determine strategic allocation to private equity that conforms with the overall asset allocation strategy.
In positioning customer portfolios at the efficient frontier, we do a historical risk-return asset class profile study from our proprietary dataset, factor in client portfolio objectives, rationalize existing portfolio commitments and make new recommendations.
For instance, we may include secondary investments in the Alternate Asset portfolio mix to mitigate the J curve, reduce blind pool risk, accelerate cash flows, and improve IRR's along with correlation advantages.
We realize that Private Equity investing, despite its illiquidity and long holding period, is far from a static process. We work with our clients to manage targeted exposure levels, assist in future commitment planning as well as advice and control your reinvestment risk, liquidity risk and market risk.
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