Diversification Benefits of REITs, PE, and HFs

CFA Level III Portfolio Management
#1

WM’s current allocation to alternative investments is presented in Exhibit 1. Quest states the justification for the allocation: “I believe that the alternative investments we have provide good liquidity and strong portfolio diversification for the remainder of the portfolio, which consists of equities and fixed income.”

Quest’s justification for the alternative investments in the WM portfolio is most likely correct with respect to:

hedge funds. private equity. real estate.

So for some color, the REITs were publicly traded, PE was a buyout strategy, and HF was distressed debt strategy. The correct answer online was real estate but I thought the CFA mentioned many times that publicly traded REITs were bad sources of diversification for equity? Please let me know your thoughts / why I should have answered REITs.

#2

“Provide good liquidity”…HF and PE don’t hit that at all. PE of buyout is stronger during high equity markets IIRC.

#3

Because REITs only meets all mentioned criteria.

PE is rather return enhancement vehicle than it provides diversification benefits and is illiquid.

HF is illiquid due to lock up period.

#4

Thanks guys yeah should have just gone based on the liquidity constraint alone

#5

Usually you have to choose an optimal allocation regarding few characteristics (constraints), not only one.