Alternative investments for institutional investors: risk budgeting techniques

This paper, produced by EDHEC Risk and Asset Management Research, presents an empirical analysis of the benefits of alternative forms of investment strategies from an asset-liability management perspective.

Using a vector error correction model that explicitly distinguishes between short-term and long-term dynamics in the joint distribution of asset returns and inflation, we identify the presence of long-term
cointegration relationships between the return on typical pension fund liabilities and the return of various traditional and alternative asset classes.

The results suggest that real estate and commodities have particularly attractive inflation-hedging properties over
long-horizons, which justify their introduction in pension funds’ liability-matching portfolios.

Overall, the results suggest that alternatives are very useful ingredients for institutional investors facing inflation-related liability constraints.