Private Assets Helped Wealth Managers Elevate Returns with Similar Risk
Wealth managers have shown increased interest in building portfolios that blend public and private markets. And they may be on to something. Our analysis shows that a 15% allocation to private assets may increase expected returns by 40 basis points annually while maintaining similar levels of market risk.1
While wealth managers may be able to help clients achieve these goals by including private assets, because private investments are typically illiquid — often involving irregular capital calls and long lockup periods — advisers must assess clients’ tolerance for illiquidity.
Enhanced diversification with public and private assets
That said, we compared a public-only portfolio with one including a 15% allocation to private assets, using the MSCI MAC Factor Model.2 This factor-based approach is particularly useful for private assets, where historical return-based estimates often understate the correlation with public markets. Performance figures are smoothed and lag due to quarterly appraisals, in contrast to the daily pricing of public markets.
Our inclusion of private assets only slightly increased the overall portfolio risk from 10% to 11%. Even though the stand-alone volatility of private assets is higher than what a smoothed return would suggest, they contributed moderately to overall risk due to their lower weight and diversification benefits compared to their public counterparts — which was reflected in their correlation with the total portfolio. For example, the private-equity allocation of 5.4% had a risk contribution of 1.2% even though the stand-alone volatility for this position is 30%.
Leveraging the potential diversification benefits and risk efficiency of private assets could help wealth managers as they seek to build more balanced portfolios tailored to clients’ goals. Factor models can help accurately measure the diversification benefit, which might be overstated by historical returns-based correlation estimates.
The efficient frontiers are estimated without concentration constraints using the MSCI MAC Factor Model (extra-long horizon with an eight-year half-life). Data as of April 30, 2025.
*Private credit consists of mezzanine and distressed credit as of April 30, 2025. **Private equity includes venture capital and buyout funds as of April 30, 2025. We show only a subset of the full portfolio allocations, selecting one public equity and one credit market to highlight risk contributions alongside private assets. The risk contribution of each asset class is the product of its weight, its stand-alone risk and its correlation with the portfolio return, estimated with the MSCI MAC Factor Model (extra-long horizon with an eight-year half-life). The table shows the x-sigma-rho decomposition, as described in Jose Menchero and Ben Davis. 2011. “Risk Contribution Is Exposure Times Volatility Times Correlation: Decomposing Risk Using the X-Sigma-Rho Formula.” Journal of Portfolio Management, 37(2), 97-106. Data as of April 30, 2025.
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1 Expected returns estimated using the MSCI Macro Finance Model (client-access only) and complemented with values collected by Peresec. Volatility estimated using the MSCI MAC Factor Model. Private equity assumed a 2% return premium over U.S. small-cap equity, and private credit a 2.1% premium over U.S. high-yield credit, both with higher standalone volatility than their public counterparts. Data as of April 30, 2025.
2 We show optimal allocations using the framework introduced in Total Portfolio Allocation for Modern Wealth, with a 6.5% expected return and a 12% risk limit.
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