New Developments in Long-Term Asset Management

Over the last three decades, long-term investors such as sovereign wealth funds, public and private pension plans, universities, and endowments associated with other non-profit entities have become increasingly important in global capital markets. These mission-driven organizations play a significant role in the well-being of current and future generations. They also have longer investment horizons than many other capital market participants.

Textbook models of optimal intertemporal portfolio choice suggest that optimal asset allocation can be both horizon-dependent and time-varying. Long-horizon investors, unlike their short-horizon counterparts, value hedges against future deterioration of their investment opportunities, and may invest accordingly. The measurement of risk, the importance of liquidity and the return penalty an investor is prepared to incur in order to preserve it, and the portfolio shares assigned to many broad asset classes may differ between long- and short-horizon investors.

Events of the last decade have raised a host of new challenges for long-term investors. Falling returns on long-term safe assets, such as inflation-indexed U.S. Treasury bonds, have made it more difficult to achieve long-term return targets without taking on additional risk. The correlations between the returns on various asset classes have also shifted, thereby raising questions about the assessment of risk over long horizons.

To investigate the theory and practice of long-term investing, and the implications of the standard theory of optimal asset allocation for long-horizon investors, the NBER, with the support of the Norwegian Finance Initiative, has launched a three-conference series. The first meeting was held in Cambridge, Massachusetts, on May 19-20, 2016, and examined a range of issues that affect the opportunity set or in other ways inform the behavior of long-term investors.