Ginanjar Dewandaru; Ng Adam Boon Ka; Abbas Mirakhor (INCEIF, 2017)
This article discusses one of the myths and the new realities of risk sharing. The myth is that risk sharing contracts are costly and demand more information than debt based contracts. The reality is that risk sharing contracts are incentive-compatible contract because there is an incentive structure in place to elicit truth-telling, trust, cooperation, hard work, and efficiency in resource management; factors that could not be written into contracts and enforced. Hence, the contracts attenuate coordination problem and improve the efficiency of outcomes.
Asset allocation is a central issue for the entire asset management industry in order to achieve the best possible risk-return profile. As the current trend shifts from intra-asset allocation to inter-asset allocation, the variety of asset classes becomes a key driver in determining the overall performance of a diversified portfolio. The rationale is that each asset class conceals its unique dimensions of risk, where a mixture of multiple asset classes may expand an investment opportunity set. This leads global investors to adopt a niche approach in order to achieve positive-sum games. The increasing importance of asset classes has substantially driven innovation in the financial industry from traditional assets (i.e. equity and fixed income) into a broader range of traditional alternative assets (private equity, real estate, commodities, currency) and modern alternative assets (hedge fund and managed futures).
