29
April
2016
|
00:00
Europe/Amsterdam

Investing for the Long Run

"We define a long-horizon investor as an investor having no specific short-term liabilities or liquidity demands, or that these short-term commitments or liquidity needs are small in proportion to the total portfolio of the investor. Long-horizon investors, therefore, have “captured” capital that will be drawn down only in the distant future." 

Summary

 

'Long-horizon investors have an edge', state Andrew Ang and Knut N. Kjaer in their 2011 paper Investing for the Long Run. 'They can ride out short-term fluctuations in risk premiums, profit from periods of elevated risk aversions and short-term mispricing, and they can pursue illiquid investment opportunities. The turmoil we have seen in the capital markets over the last decade has increased the competitive advantage of a long investment horizon. 

Unfortunately, the two biggest mistakes of long-horizon investors - procyclical investments and misalignments between asset owners and managers - negate the long-horizon advantage. Long-horizon investors should harvest many sources of factor risk premiums, be actively contrarian, and align all stakeholders so that long-horizon strategies can be successfully implemented. Illiquid assets can, but do not necessarily, play a role for longhorizon investors, but investors should demand high premiums to compensate for bearing illiquidity risk and agency issues.'