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Macro Factor Model: Application to Liquid Private Portfolios

Scott Gladstone, Ananth Madhavan, Anita Rana and Andrew Ang
The Journal of Portfolio Management Investment Models 2021, jpm.2021.1.231; DOI: https://doi.org/10.3905/jpm.2021.1.231
Scott Gladstone
is a vice president at BlackRock, Inc., in San Francisco, CA
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Ananth Madhavan
is a managing director at BlackRock, Inc., in San Francisco, CA
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Anita Rana
is a vice president at BlackRock, Inc., in London, UK
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Andrew Ang
is a managing director at BlackRock, Inc., in New York, NY
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Abstract

We show how macro factors—economic growth, inflation, real rates, credit, emerging markets, and liquidity—can be used to model private market returns. The framework helps to identify the different components of private returns: those that are common to public market returns, return components common across private markets, specific return components to a particular illiquid market, and leverage. We apply the framework with factor models of private real estate, infrastructure, and private equity, which can be implemented in liquid instruments. Having modeled both public and private market assets with the same risk factors, we then use the framework to create an optimal combined public–private multi-asset portfolio.

TOPICS: Private equity, real estate, other real assets, portfolio construction

Key Findings

  • ▪ Macro factors such as growth and inflation can be used to model private market returns.

  • ▪ We show how factor models of private real estate, infrastructure, and private equity can be implemented in a liquid private portfolio and ultimately in an optimal combined public–private multi-asset portfolio.

  • ▪ Liquid private portfolios are not a replication solution, but rather an all-in alternatives solution in which we can use exchange-traded funds as a liquid interim vehicle.

  • © 2021 Pageant Media Ltd
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The Journal of Portfolio Management: 47 (5)
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Investment Models 2021
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Macro Factor Model: Application to Liquid Private Portfolios
Scott Gladstone, Ananth Madhavan, Anita Rana, Andrew Ang
The Journal of Portfolio Management Mar 2021, jpm.2021.1.231; DOI: 10.3905/jpm.2021.1.231

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Macro Factor Model: Application to Liquid Private Portfolios
Scott Gladstone, Ananth Madhavan, Anita Rana, Andrew Ang
The Journal of Portfolio Management Mar 2021, jpm.2021.1.231; DOI: 10.3905/jpm.2021.1.231
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  • Article
    • Abstract
    • WHY LIQUID PRIVATE PORTFOLIOS?
    • MACRO FACTOR FRAMEWORK
    • EMPIRICAL RESULTS
    • A PUBLIC–PRIVATE MULTI-ASSET PORTFOLIO
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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