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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
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