Strategic Investing in Illiquid Assets: A Modern Portfolio Approach

Advisor: Max Sina Knicker, MSc.

Type: Master's Thesis
Start: asap (June 2025)

 

Overview

Strategic Asset Allocation (SAA) traditionally centers around liquid assets with readily available return time series. However, the surge in institutional allocations to illiquid alternatives, such as private equity, demands a paradigm shift. This thesis builds on a novel replication-based methodology for estimating synthetic return time series for illiquid assets—originally developed to extend Markowitz-style portfolio theory into the private markets domain.

The existing framework integrates real cash flow data to infer risk-return-liquidity characteristics of illiquid assets and incorporates them into classical CAPM models. Yet, it remains static. This project proposes a dynamic extension to the model, addressing two major practical challenges: (1) defining optimal pacing strategies to reach a target allocation over time, and (2) incorporating forward-looking risk estimates using predictive models and simulations.

Objective

• Extend the current static SAA model by developing a time-dependent pacing strategy that optimally sequences investments into illiquid assets while respecting investor-specific liquidity preferences.
• Develop a forward-looking risk estimation module, e.g., via Monte Carlo simulations or machine learning models, to enhance decision-making under uncertainty.
• Quantify the impact of these enhancements on optimal portfolio construction and compare results across investor profiles (e.g., endowments vs. pension funds).
• Implement a simulation-based backtesting environment to validate

Requirements

• Strong interest in Asset Allocation, Private Markets, and Quantitative Finance
• Solid programming skills (e.g., Python) and experience with portfolio simulation or optimization libraries
• Ability to conduct applied research and translate academic insights into implementable frameworks

Supervision & Support

• Close collaboration on model architecture, portfolio theory, and illiquidity modeling
• Feedback on implementation, empirical testing, and academic writing
• Optional: integration of your work into ongoing research on institutional portfolio construction

Contact & Application

If you are interested in writing your thesis on this topic, please indicate this in your application. Please note that this topic can be expanded and/or taken in other directions depending on the student's own interests and ideas.