@article {Soni107, author = {Amit Soni}, title = {Performance Dispersion Risk Assessment in Alternatives and Active Strategies}, volume = {22}, number = {4}, pages = {107--119}, year = {2020}, doi = {10.3905/jai.2020.1.088}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Alternatives have gained significant investor attention recently. Unfortunately, the lack of a holistic investment framework to incorporate alternatives in a traditional portfolio poses a challenge. Traditional risk{\textendash}return based approaches, alone, over allocate to alternatives{\textemdash}a result of underestimation of risks resulting from (a) significant manager dispersion and (b) smoothness in the pooled return indexes used for alternatives. Much research corrects for smoothness of returns; however, the risk from performance dispersion remains mostly unaddressed. In this study, the author discusses a methodology to quantify performance dispersion risk and incorporate it in the portfolio construction process.TOPICS: Real assets/alternative investments/private equity, statistical methods, performance measurementKey Findings{\textbullet} Alternative investments exhibit a much higher degree of performance dispersion among managers than traditional asset classes.{\textbullet} Traditional risk measurement approaches on pooled return indices utilized for alternatives underestimate the actual risk of an investment in alternative asset classes.{\textbullet} Performance dispersion risk of investing in an alternative strategy can be measured similar to the idiosyncratic risk of a stock and should be included in any risk-based portfolio construction process.}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/22/4/107}, eprint = {https://jai.pm-research.com/content/22/4/107.full.pdf}, journal = {The Journal of Alternative Investments} }