Method and system for asset allocation

Abstract

A method and system of matching an investor's objectives for portfolio investment return and risk with an assessment of a range of expected returns and risks that are likely to be generated by investment portfolios consisting at least in part of alternative asset classes that involves, for example, selecting available historical data for a plurality of alternative asset classes, unsmoothing the historical data based at least in part on historical data for traditional asset classes related to the respective alternative asset classes, and correcting the historical data for the alternative asset classes for an impact of survivorship and selection biases. A forecast of an expected return and risk is computed for each of the alternative asset classes, based at least in part on the unsmoothed and corrected historical data for the alternative asset classes, and at least one of the alternative asset classes that has an expected return and risk that corresponds substantially to the investor's objectives for portfolio investment return and risk is identified for inclusion in the investment portfolio.

1 . A computer-implemented method of matching an investor's objectives for portfolio investment return and risk with an assessment of a range of expected returns and risks that are likely to be generated by investment portfolios consisting at least in part of illiquid alternate asset classes, comprising:
 selecting available historical data for a plurality of illiquid alternate asset classes comprising at least one of a private equity fund and a privately-held real estate fund by a first computer software application executing on a physical computing machine;   unsmoothing the historical data by computing an estimate of marked-to-market returns for the illiquid alternate asset classes based at least in part on historical data for liquid asset classes related to the respective illiquid alternate asset classes by a second computer software application process executing on the physical computing machine;   correcting the historical data for the illiquid alternate asset classes for an impact of survivorship and selection biases by a third computer software application process executing on the physical computing machine;   computing a forecast of an expected return and risk for each of the illiquid alternate asset classes based at least in part on the unsmoothed and corrected historical data for the illiquid alternate asset classes by a fourth computer software application process executing on the physical computing machine; and   identifying at least one of the illiquid alternate asset classes having an expected return and risk that corresponds substantially to the investor's objectives for portfolio investment return and risk for inclusion in the investment portfolio by a fifth computer software application process executing on the physical computing machine.   
     
     
         2 . The method of  claim 1 , wherein said illiquid alternate asset classes comprise a private equity fund. 
     
     
         3 . The method of  claim 2 , wherein said private equity fund comprises a venture capital fund. 
     
     
         4 . The method of  claim 2 , wherein said private equity fund comprises a leveraged buyout fund. 
     
     
         5 . The method of  claim 2 , wherein said private equity fund comprises a natural resources fund. 
     
     
         6 . The method of  claim 1 , wherein said illiquid alternate asset classes comprise a privately-held real estate fund. 
     
     
         7 . The method of  claim 1 , wherein unsmoothing the historical data further comprises computing an estimate of marked-to-market returns for the illiquid alternate asset classes based at least in part on the historical data for the traditional asset classes related to the respective illiquid alternate asset classes. 
     
     
         8 . The method of  claim 1 , wherein correcting the historical data for an impact of survivorship and selection biases further comprises computing an estimate of the impact of survivorship and selection biases based at least in part on modeling techniques and academic research. 
     
     
         9 . The method of  claim 1 , wherein computing the forecast of expected return and risk for each of the illiquid alternate asset classes further comprises computing the forecast of expected return and risk incrementally. 
     
     
         10 . The method of  claim 4 , wherein computing the forecast of expected return and risk incrementally further comprises computing the forecast incrementally beginning with lower-risk illiquid alternate asset classes and progressing to higher-risk illiquid alternate asset classes. 
     
     
         11 . The method of  claim 1 , wherein computing the forecast of expected return and risk further comprises adjusting the computation for an impact of fees on expected return. 
     
     
         12 . The method of  claim 11 , wherein adjusting the computation for the impact of fees further comprises subtracting fees for a fund-of-funds from a computation of the estimate of return. 
     
     
         13 . The method of  claim 1 , wherein computing the forecast of expected return and risk further comprises adjusting the computation for an impact of taxes on expected return for a taxable investor. 
     
     
         14 . The method of  claim 1 , further comprising computing an estimate of downside risk effect of the at least one identified illiquid alternate asset class on the investor's objectives for portfolio investment return and risk. 
     
     
         15 . The method of  claim 14 , wherein computing the estimate of downside risk effect further comprises quantifying the downside risk using value-at-risk (VaR) at a predetermined level of confidence. 
     
     
         16 . The method of  claim 1 , further comprising computing estimates for a plurality of expected returns for the at least one identified illiquid alternate asset class at a plurality of levels of risk. 
     
     
         17 . The method of  claim 16 , wherein computing the estimates for the plurality of expected returns further comprises computing the estimates using Monte Carlo simulation. 
     
     
         18 . The method of  claim 1 , further comprising computing an estimate of at least one of an enhancement effect on return and a reduction effect on risk of a degree of illiquidity of the at least on identified illiquid alternate asset class on the investor's objectives for portfolio investment return and risk. 
     
     
         19 . The method of  claim 18 , wherein computing the estimate of said at least one of the enhancement and reduction effects further comprises computing the estimate based on investment limitations imposed by the degree of illiquidity of the at least one identified illiquid alternate asset class on the investor's objectives for portfolio investment return and risk. 
     
     
         20 . The method of  claim 18 , wherein computing the estimate of said at least one of the enhancement and reduction effects further comprises computing the estimate based on investor constraints imposed by the degree of illiquidity of the at least one identified illiquid alternate asset class on the investor's objectives for portfolio investment return and risk. 
     
     
         21 . A computer-implemented system for matching an investor's objectives for portfolio investment return and risk with an assessment of a range of expected returns and risks that are likely to be generated by investment portfolios consisting at least in part of illiquid alternate asset classes, comprising:
 a first computer software application process executing on a physical computing machine that selects available historical data for a plurality of illiquid alternate asset classes comprising at least one of a private equity fund and a privately-held real estate fund;   a second computer software application process executing on the physical computing machine that unsmooths the historical data by computing an estimate of marked-to-market returns for the illiquid alternate asset classes based at least in part on historical data for liquid asset classes related to the respective illiquid alternate asset classes;   a third computer software application process executing on the physical computing machine that corrects the historical data for the illiquid alternate asset classes for an impact of survivorship and selection biases;   a fourth computer software application process executing on the physical computing machine that computes a forecast of an expected return and risk for each of the illiquid alternate asset classes based at least in part on the unsmoothed and corrected historical data for the illiquid alternate asset classes; and   a fifth computer software application process executing on the physical computing machine that identifies at least one of the illiquid alternate asset classes having an expected return and risk that corresponds substantially to the investor's objectives for portfolio investment return and risk for inclusion in the investment portfolio.