The Endowment Model and Modern Portfolio Theory

We develop a dynamic portfolio choice model with illiquid alternative assets to analyze the “endowment model,” widely adopted by institutional investors, such as pension funds, university endowments, and sovereign wealth funds. In model, asset has lockup but can be liquidated at any time paying proportional cost. how investors engage in liquidity diversification investing multiple staggered expirations show that doing so increases alternatives allocations investor welfare. illiquidity from lockups interacts secondary market transaction costs resulting endogenous time-varying rebalancing boundaries. extend allow crisis states increased during crises causes holdings deviate significantly target allocations. This paper was accepted Bruno Biais, finance. Funding: S. G. Dimmock gratefully acknowledges financial support Singapore Ministry of Education [Grant R-315-000-133-133]. N. Wang CKGSB Research Institute. J. Yang National Natural Science Foundation China [Grants 71772112, 71972122, 72072108], Innovative Team Shanghai University Finance Economics 2016110241], Shuguang Program Development Municipal Commission. Supplemental Material: Data are available https://doi.org/10.1287/mnsc.2023.4759 .