Backtesting Private Asset Models
categories: Research Insight, Research Paper, general, LIU Yang, SHEPARD Peter, Portfolio Management Analytics, Risk Management Analytics, Alternatives, Multi-Asset Class
tags: private_assets, asset allocation and asset liability management, risk_management,
MSCI’s Barra Private Real Estate Model (PRE2) and Barra Private Equity Model (PEQ2) have advanced the understanding of investments in global private assets. Private assets were once considered low-risk investments uncorrelated with most public assets due to the smoothness in private asset valuations. With innovative statistical methodology, the MSCI private asset models reveal the intrinsic risk in private assets, show large exposures to systematic risk factors driving public assets and provide timely risk forecasts for illiquid investments on a like-to-like basis with all other asset classes. The models reveal both large risk in private assets and large opportunities for global diversification. In this paper, we backtest the risk forecasts from the PRE2 and PEQ2 models.