How Much Beta Is Just Right? Linking Investment Objective and Portfolio Choice

Abstract

Alpha forecasting for hedge funds is much less reliable than beta forecasting, which explains the proliferation of mostly risk-based portfolio construction processes for alternatives. When implementing those processes, investors are faced with certain strategic choices, including choosing the long-term level of market exposure, or beta, on the portfolio level. There is no universal guidance that drives that choice. That said, the authors have found that for a particular—and quite popular—form of the investment objective, one can develop such guidance, derive analytical expressions for the correct level of market exposure, and create a practical portfolio construction framework that directly links the investment objectives and portfolio choice.

TOPICS: Real assets/alternative investments/private equity, portfolio construction, performance measurement