Implications of Increased Alternative Investments for Foundations

Hard Institutional Portfolio Mgmt Foundations And Endowments

The LMN Foundation is a mid-sized nonprofit organization dedicated to biodiversity conservation efforts worldwide. With an endowment of $500 million, the Foundation has a long-term investment horizon and requires an annual distribution of 4% to support its conservation programs. Due to recent changes in global economic conditions, the investment committee is considering a shift in the asset allocation strategy to include more alternative investments, seeking to enhance returns while managing risk.

As part of this potential strategy change, the investment committee is tasked with evaluating the potential impact of increased alternative investments on the portfolio's risk-return profile. The committee recognizes the importance of maintaining sufficient liquidity to meet the Foundation's annual distribution needs.

Which of the following statements best reflects the implications of the shift toward greater allocation to alternative investments for the LMN Foundation?

Increasing exposure to alternatives will result in higher expected returns while also maintaining the same liquidity profile as traditional investments.

A higher allocation to alternative investments may lead to a less liquid portfolio, potentially creating challenges in meeting the annual distribution needs.

Shifting to alternative investments guarantees increased diversification without any increase in volatility.

Hint

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