Zephyr Associates Inc. Research: Utilizing the Black-Litterman Model to Accommodate Alternative Investments

By Zephyr Associates Inc., PRNE
Tuesday, November 15, 2011

ZEPHYR COVE, Nevada, November 16, 2011 -

- New Research Paper Weighs Arguments For and Against Adding Alternative Assets to Leading Model in Order to Better Forecast Returns

Zephyr Associates Inc., a leading provider of portfolio analysis and reporting solutions for financial management professionals around the world, today issued a new research paper titled The Black-Litterman Model and Alternative Investments. The paper discusses the various issues of incorporating alternative assets, including real estate, hedge funds, commodities, municipal bonds, cash and private equity, into the Black-Litterman model, as well as solutions and options for overcoming these challenges.

“Over the past ten years, the Black-Litterman model has gathered a lot of attention and acceptance as a way to forecast future asset class returns for traditional, long-only asset classes with quantifiable market capitalizations. The challenge has been extending those Black-Litterman ideas to alternative investments,” said Zephyr Director of Applied Research Marc Odo. “One school of thought insists that it is inappropriate to integrate alternatives into the Black-Litterman model in the absence of precise market capitalization data. But we have found that as long as the spirit of the model is intact and the investor uses reasonable estimates and definitions, utilizing Black-Litterman to forecast alternative returns can offer substantial value.”

The paper details the challenges of utilizing alternative investments within Black-Litterman, including listing specific issues with a variety of alternative asset classes, and offers practical and pragmatic solutions for incorporating these investments into the Black-Litterman framework.

“Deciding whether or not forecasting alternatives with this model is appropriate is ultimately up to individual investors and financial professionals,” Mr. Odo said. “The Black-Litterman model goes a long way in addressing the shortcomings of mean variance optimization; it would be a shame not to use it because of alternatives. ¬†However, with a few well thought-out modifications and provisions the Black-Litterman model can viably incorporate alternative investments.”

The full paper, along with additional research from Zephyr, is available at www.styleadvisor.com/resources/articles.html

For more information about Zephyr, please contact Jami Schlicher at +1-973-850-7309 or jschlicher@jcprinc.com.

About Zephyr Associates Inc.

Zephyr Associates is a global leader in the development of portfolio analysis tools and methodologies for the investment management industry. Using Zephyr’s software and services, investment professionals are able to quantify the value of an investment and build new ideas to improve performance, preserve capital and limit risk.

Zephyr was founded in 1994 and is headquartered in Zephyr Cove, Nev., with additional offices in Memphis, Tenn., New York and London. Zephyr’s software products are used by advisors, money managers and fiduciaries throughout the world to analyze investment managers, mutual funds, financial markets and investment portfolios.¬†For more information, please visit www.styleadvisor.com.


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