How Risky Are Illiquid Investments?

Abstract

Highly illiquid and non–traded investments?such as private real estate, leveraged buyouts, and venture capital?have historically been very hard to compare to traditional investments. This is particularly problematical when one considers how to include these assets in a traditional portfolio of assets. For the purposes of asset allocation, it is critical that illiquid asset classes are made comparable to liquid asset classes. An estimation procedure here may help to assess the true risks and diversification benefits presented by illiquid asset classes more accurately. Even though the approach involves some assumptions, it should provide a better picture of the variations in illiquid returns.