Incorporating Uncertainty About Alternative Assets in Strategic Pension Fund Asset Allocation

10 Pages Posted: 16 Jun 2008

See all articles by Wilma de Groot

Wilma de Groot

Robeco Asset Management

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Asset Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 2007

Abstract

We present an asset allocation framework for pension funds in which they can take pension liability risk and uncertainty about future expected asset returns explicitly into account. This framework recognized the liability hedging properties of assets that correlate positively with changes in the market value of pension liabilities. In addition, uncertainty about the expected returns, especially on alternative asset classes can be taken into account to arrive at realistic and acceptable asset allocations compared with standard portfolio optimization models. The empirical examples for pension funds in the United Kingdom indicate that for modest assumptions on expected returns of alternative assets ranging between 2 and 3 per cent above pension liabilities, the optimal portfolio allocation to alternatives ranges between 15 and 30 per cent.

Keywords: Alternative investments, Asset allocation, Liability driven investing; Robust optimization; Uncertainty

JEL Classification: G11, G22, G23

Suggested Citation

de Groot, Wilma and Swinkels, Laurens, Incorporating Uncertainty About Alternative Assets in Strategic Pension Fund Asset Allocation (November 2007). Available at SSRN: https://ssrn.com/abstract=1146410 or http://dx.doi.org/10.2139/ssrn.1146410

Wilma De Groot (Contact Author)

Robeco Asset Management ( email )

Rotterdam, 3014 DA
Netherlands
+31 10 224 3107 (Phone)

Laurens Swinkels

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

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