Rethinking Portfolio Construction and Private Equity at AQR’s Nordic Research Forum

SHoF professors Magnus Dahlquist and Per Strömberg participated in a program spanning asset allocation, private equity and systematic investing, bringing academic perspectives to questions facing institutional investors.

How Should Investors Rethink Portfolio Construction?

Magnus Dahlquist, Handelsbanken Professor of Finance at the Stockholm School of Economics, joined the panel "Rethinking Portfolio Construction" alongside AQR's Antti Ilmanen, Magdalena Högberg of AP4 and Lea Vaisalo of Velliv.

Following presentations on investing amid inflation and macroeconomic uncertainty and applying a quantitative lens to the total portfolio approach, the session brought together perspectives from academic research, investment management and institutional asset owners.

Dahlquist, who recently co-authored an external evaluation of Denmark's ATP, highlighted the challenge of staying committed to diversification during periods of underperformance. Even a portfolio designed to meet a pension fund's liabilities can face pressure when a board's evaluation horizon is too short, prompting a return to benchmarks just when diversification may be most valuable.

"You have to look at processes rather than performance. With a long enough horizon, you can discuss performance too," he said.

He also emphasized the governance implications of a total portfolio approach, where the board's role shifts from setting the asset mix to setting the problem and judging how it is answered.

"The key thing with the total portfolio approach is that the board hands management the problem instead of the solution. One could argue that's the right way to do it. But under delegation, a clear mandate and honest reporting back to the board matter more than anything else," Dahlquist said.

How Do Governance and Liquidity Shape Private Equity Investing?

Per Strömberg, Centennial Professor of Finance and Private Equity at the Stockholm School of Economics, contributed a presentation titled “Private Equity Governance and Liquidity: A Simple Framework.”

In this session he presented a framework for understanding private equity markets, as a function of two central economic forces: governance and liquidity. Private equity adds value to companies through active governance, but active ownership requires privately informed investors with large stakes, which in turn makes the investment illiquid.

“The first obvious implication is that not every firm can be owned by private equity or should be owned by private equity. […] Private equity may be adding value to any firm, but not enough to justify the cost of illiquidity and fund fees,” he said.

The framework also implied why private equity has limited investment horizons, why buyouts are associated with high leverage, and why the PE market is so cyclical.

The wider program featured welcome remarks from AQR’s Daniel Whitehouse, a macroeconomic presentation by Jordan Brooks, and a session on quantitative stock selection by Laura Serban. AQR co-founder Cliff Asness delivered an update before the concluding remarks.