Asset Allocation and Returns in the Portfolios of the Wealthy

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• Cynthia Balloch (LSE)
• Thursday 28 October 2021, 13:00-14:00
• Online.

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Despite accounting for a large amount of total wealth, there is little direct empirical evidence of the investment behavior of wealthy households. Based on a proprietary database of investment portfolios and returns, we document three new facts about ultra-high net worth portfolios. First, asset allocations change strongly with total wealth, as super-wealthy households hold a much larger share of alternative investments, such as private equity and hedge funds, and a lower share of liquid assets, such as public equities. The data includes a significant number of portfolios large enough to explore allocations and returns within the top percentile of the wealth distribution, including the top 0.01 percent. Second, while realized returns are increasing with wealth, Sharpe ratios are broadly similar across the top of the wealth distribution. This suggests that investment skill does not differ among investors in upper portions of the wealth distribution, but that risk tolerance increases with total wealth. Third, we use the data to explore whether returns differ within narrow asset classes, and find that returns on alternative assets in particular are increasing in wealth. This indicates that access and manager selection play a large part in determining returns and raises questions about the benefits of broadening access to delegated investing in private assets. Taken together, these findings substantially improve on existing empirical evidence on return heterogeneity in the U.S., which is increasingly understood to be critical in both macroeconomic dynamics and asset pricing.

This talk is part of the Cambridge Finance Workshop Series series.

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