Question on position sizing for illiquid assets and maintaining portfolio diversification

Question

I've been trying to refine my risk management framework, especially when dealing with less liquid assets like certain private equity allocations or even some niche real estate plays. While I understand the general principles of position sizing based on portfolio volatility and individual asset risk, I'm finding it tricky to apply this robustly when exit liquidity isn't guaranteed or market prices are infrequent. How do others here approach position sizing for these types of illiquid investments while still ensuring the overall portfolio remains adequately diversified and doesn't get disproportionately skewed if one of these less tradable assets underperforms significantly?

jhernandez · Accepted Answer

For illiquid assets, the sizing often comes down to what you can afford to lock up indefinitely, rather than just market volatility. Diversification helps, but if a significant portion is illiquid, the 'diversification' benefit might be theoretical if you can't rebalance.

ananya_desai · Answer

This is a great question. I've often wondered about this myself. How do you even go about valuing these illiquid assets when there's no clear market price to benchmark against?

jasmine_p · Answer

This is a great question. I've often wondered how people factor in the potential for a really long holding period, or even a forced sale at a discount, when sizing illiquid positions. Does your framework account for different potential exit scenarios?

Question on position sizing for illiquid assets and maintaining portfolio diversification

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