Bankers, Markets & Investors nº 148 may-june 2017

Dear Readers,

While investing in alternative illiquid asset classes (e.g. real estate, private equity, and infrastructure) is becoming increasingly popular among institutional investors, the lack of comprehensive datasets for illiquid investments poses serious challenges to academic researchers. Despite these impediments, signifiant research breakthroughs have been made in recent years in understanding the performance and risk drivers of illiquid investments. This special issue of Bankers Markets and Investors includes four contributions from leading academic researchers and professional experts in this topical fild of research. Heidi Falkenbach and Martin Hoesli study the advantages and drawbacks associated with direct and indirect real estate investing. They show that while direct real estate offrs flxibility in terms of portfolio strategy, they also lead to various implementation challenges that can be better addressed through alternative types of investment structures such as listed (REITs or REOs), openended and private equity real estate (PERE) funds. Thijs Markwat and Roderick Molenaar examine the risk-return characteristics of private equity investments in a strategic asset allocation context. Consistent with the existing private equity literature, they fid that investments in private equity should be considered only when there is suffient confience in manager selection capabilities, as the systematic component of a private equity fund return is diffilt to disentangle from the specifi manager selection and timing skills. Robert Bianchi, Michael Drew and Timothy Whittaker investigate the return biases associated with the appraisal-based valuation of unlisted infrastructure investments. Using the IPD/MSCI Australia Unlisted Infrastructure Index as a proxy, they fid statistical evidence of calendar bias in unlisted infrastructure quarterly returns, with the June fiancial quarter exhibiting the highest average return and volatility estimates. They also fid the presence of appraisal smoothing over longer time frames than in real estate (12 months vs 6 months). Finally, Serge Darolles and Mathieu Vaissié develop a new asset allocation approach that addresses the risk and return dimensions simultaneously: Diversifiation-at-a-Reasonable Price (DAARP). They show that for investors facing liability constraints, alternative illiquid investments strategies - such as real estate, private equity or infrastructure - do not necessarily dominate traditional illiquid investment strategies - such as small caps, emerging markets or high yield. We hope that this special issue will provide valuable insights into the “art and science” of illiquid asset investments.
Emmanuel Jurczenko

Associate Dean and Professor of Finance, Ecole hôtelière de Lausanne
HES-SO // University of Applied Sciences Western Switzerland