Over the past few decades, the international investment markets have grown increasingly more sophisticated and provide a wide variety of investment strategies that investment fund managers can employ to meet their investment objectives. As global liquidity has increased and capital markets have become more efficient, the returns from traditional asset classes are expected to decline relative to historical experience. In view of this, many asset managers have diversified their investment portfolios beyond derivatives and wider global equity markets to include alternative assets in order to achieve their investment return requirements. Typically alternative assets are less efficiently priced than traditional marketable securities, and therefore provide opportunities to exploit market inefficiencies through active management.
This paper has been written from the perspective of providing institutional investors with an insight into why private equity, as a subset of alternative assets, should be part of a diversified portfolio. It is the result of market research undertaken by New Zealand Venture Investment Fund Limited (NZVIF).
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