Asset Allocation and Returns in the Portfolios of the Wealthy

There is little direct empirical evidence on the investment behavior of wealthy households. Based on a proprietary database of investment portfolios and returns, we document three new facts. First, wealthy households hold a larger share of alternative investments, such as private equity and hedge funds, and a lower share of liquid assets, such as public equities. Second, returns and risk-adjusted returns increase at the top of the wealth distribution, by a larger margin in risk-adjusted terms. This is driven by higher risk tolerance and better diversification. Third, we show that returns on alternative assets in particular are increasing in wealth.

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