Factor Analysis of Private Capital Returns

This third report in our factor analysis series demonstrates the impact of factors on portfolio construction and how the approach can be a potentially powerful tool for multi-asset investors.

• Mean-variance optimization (MVO) will overweight alternatives even if unsmoothed index volatility is utilized, especially for infrastructure and private equity

• Our latest test scenario reveals significant MVO portfolio exposure to the liquidity factor and inflation factor risk, compared with a 60/40 portfolio

• Investors may decrease exposure to the liquidity factor or inflation risk, but active factor selection may increase risk elsewhere in the portfolio