Harmful Diversification: Evidence from Alternative Investments

Emmanouil Platanakis; Athanasios Sakkas; Charles Sutcliffe

doi:10.1016/j.bar.2018.08.003

Harmful Diversification: Evidence from Alternative Investments

Emmanouil Platanakis, Athanasios Sakkas, Charles Sutcliffe

Research output: Contribution to journal › Article › peer-review

23 Citations (SciVal)

134 Downloads (Pure)

Abstract

Alternative assets have become as important as equities and fixed income in the
portfolios of major investors, and so their diversification properties are also
important. However, adding five alternative assets (real estate, commodities,
hedge funds, emerging markets and private equity) to equity and bond
portfolios is shown to be harmful for US investors. We use 19 portfolio models,
in conjunction with dummy variable regression, to demonstrate this harm over
the 1997–2015 period. This finding is robust to different estimation periods,
risk aversion levels, and the use of two regimes. Harmful diversification into
alternatives is not primarily due to transactions costs or non-normality, but to
estimation risk. This is larger for alternative assets, particularly during the credit
crisis which accounts for the harmful diversification of real estate, private equity
and emerging markets. Diversification into commodities, and to a lesser extent
hedge funds, remains harmful even when the credit crisis is excluded.

Original language	English
Pages (from-to)	1-23
Number of pages	23
Journal	British Accounting Review
Volume	51
Issue number	1
Early online date	24 Aug 2018
DOIs	https://doi.org/10.1016/j.bar.2018.08.003
Publication status	Published - 1 Jan 2019
Event	European Financial Management Association (EFMA) Annual Meetings 2017 - Deree – The American College of Greece, Athens, Greece Duration: 28 Jun 2017 → 30 Jun 2017 http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2017-Athens/2017%20meetings.php

Keywords

Alternative assets
Diversification
Estimation errors
Transactions costs
Non-normality
Regimes

ASJC Scopus subject areas

General Business,Management and Accounting
Economics, Econometrics and Finance(all)

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10.1016/j.bar.2018.08.003

ALT_BAR_forthcoming - SSRN - pureAccepted author manuscript, 876 KBLicence: CC BY-NC-ND

Cite this

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title = "Harmful Diversification: Evidence from Alternative Investments",

abstract = "Alternative assets have become as important as equities and fixed income in theportfolios of major investors, and so their diversification properties are alsoimportant. However, adding five alternative assets (real estate, commodities,hedge funds, emerging markets and private equity) to equity and bondportfolios is shown to be harmful for US investors. We use 19 portfolio models,in conjunction with dummy variable regression, to demonstrate this harm overthe 1997–2015 period. This finding is robust to different estimation periods,risk aversion levels, and the use of two regimes. Harmful diversification intoalternatives is not primarily due to transactions costs or non-normality, but toestimation risk. This is larger for alternative assets, particularly during the creditcrisis which accounts for the harmful diversification of real estate, private equityand emerging markets. Diversification into commodities, and to a lesser extenthedge funds, remains harmful even when the credit crisis is excluded.",

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author = "Emmanouil Platanakis and Athanasios Sakkas and Charles Sutcliffe",

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T1 - Harmful Diversification: Evidence from Alternative Investments

AU - Platanakis, Emmanouil

AU - Sakkas, Athanasios

AU - Sutcliffe, Charles

PY - 2019/1/1

Y1 - 2019/1/1

N2 - Alternative assets have become as important as equities and fixed income in theportfolios of major investors, and so their diversification properties are alsoimportant. However, adding five alternative assets (real estate, commodities,hedge funds, emerging markets and private equity) to equity and bondportfolios is shown to be harmful for US investors. We use 19 portfolio models,in conjunction with dummy variable regression, to demonstrate this harm overthe 1997–2015 period. This finding is robust to different estimation periods,risk aversion levels, and the use of two regimes. Harmful diversification intoalternatives is not primarily due to transactions costs or non-normality, but toestimation risk. This is larger for alternative assets, particularly during the creditcrisis which accounts for the harmful diversification of real estate, private equityand emerging markets. Diversification into commodities, and to a lesser extenthedge funds, remains harmful even when the credit crisis is excluded.

AB - Alternative assets have become as important as equities and fixed income in theportfolios of major investors, and so their diversification properties are alsoimportant. However, adding five alternative assets (real estate, commodities,hedge funds, emerging markets and private equity) to equity and bondportfolios is shown to be harmful for US investors. We use 19 portfolio models,in conjunction with dummy variable regression, to demonstrate this harm overthe 1997–2015 period. This finding is robust to different estimation periods,risk aversion levels, and the use of two regimes. Harmful diversification intoalternatives is not primarily due to transactions costs or non-normality, but toestimation risk. This is larger for alternative assets, particularly during the creditcrisis which accounts for the harmful diversification of real estate, private equityand emerging markets. Diversification into commodities, and to a lesser extenthedge funds, remains harmful even when the credit crisis is excluded.

KW - Alternative assets

KW - Diversification

KW - Estimation errors

KW - Transactions costs

KW - Non-normality

KW - Regimes

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T2 - European Financial Management Association (EFMA) Annual Meetings 2017

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ER -

Harmful Diversification: Evidence from Alternative Investments

Abstract

Keywords

ASJC Scopus subject areas

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Emmanouil Platanakis

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Harmful Diversification: Evidence from Alternative Investments

Abstract

Keywords

ASJC Scopus subject areas

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Emmanouil Platanakis

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