medium · FRM Part 2 Risk & Investment Management
A Chief Investment Officer decides to 'pause' all new private equity commitments for 24 months to combat a 15% overweight caused by the denominator effect.
According to commitment pacing models, what is the most likely medium-term consequence of this tactical move?
- An 'allocation hole' will surface 3-5 years later, and the institution will likely miss out on high-performing 'crisis-vintage' returns.
- The management fee burden will rise as a percentage of NAV because the portfolio becomes concentrated in aging, underperforming zombie funds.
- The overall portfolio's duration will decrease substantially, meaningfully reducing the fund's exposure to interest rate risk going forward.
- The private equity weight will snap back to target immediately as existing legacy funds begin distributing accumulated cash to investors.
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