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Article

Alternatives and Liquidity: Will Spending and Capital Calls Eat Your “Modern” Portfolio?

Laurence B Siegel
The Journal of Portfolio Management Fall 2008, 35 (1) 103-114; DOI: https://doi.org/10.3905/JPM.2008.35.1.103
Laurence B Siegel
is the director of research, Investment Division, at the Ford Foundation in New York, NY..
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  • For correspondence: l.siegel@fordfound.org
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Abstract

High allocations to alternative investments by investors, such as foundations and endowments, raise infrequently discussed concerns about liquidity. As the percentage of assets under management invested in alternatives rises, the availability of liquid equities and bonds available to meet spending requirements, capital calls, and margin calls plummets. A series of simulations shows how severe this problem can become in bear markets. The remedy for this problem is to ladder gradually into illiquid assets, so that expected future cash flows from these assets partially or fully offset capital calls and other cash requirements. New and enthusiastic investors in illiquid alternative investments sometimes forget this principle. By adhering to it, an alternatives program can be successful, but not on an unlimited scale. It is also necessary to hold a considerable portion of a portfolio in liquid stocks and bonds.

  • © 2008 Institutional Investor, Inc.
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Alternatives and Liquidity: Will Spending and Capital Calls Eat Your “Modern” Portfolio?
Laurence B Siegel
The Journal of Portfolio Management Oct 2008, 35 (1) 103-114; DOI: 10.3905/JPM.2008.35.1.103

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Alternatives and Liquidity: Will Spending and Capital Calls Eat Your “Modern” Portfolio?
Laurence B Siegel
The Journal of Portfolio Management Oct 2008, 35 (1) 103-114; DOI: 10.3905/JPM.2008.35.1.103
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  • Article
    • Abstract
    • CAPITAL CALLS
    • WHAT ARE CURRENT ALLOCATIONS? HOW DID WE GET HERE?
    • SIMULATION SETUP
    • SIMULATION RESULTS
    • ADVICE TO THE INVESTOR: “LADDER” THE ALTERNATIVES PORTFOLIO
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
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  • PDF (Subscribers Only)

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