Explanation:

Andrew Ang identifies four ways to harvest the illiquidity premium:

Passive allocations to illiquid asset classes.
Holding less liquid securities within asset classes.
Market making at the individual security level.
Dynamic rebalancing at the aggregate level. Among these, he points out that dynamic rebalancing at the aggregate level (portfolio level) is generally the simplest to implement—as it involves buying assets that have fallen in value (often during periods of market stress when liquidity is scarce and illiquidity premiums are high) and selling those that have risen—and it has the greatest impact on overall portfolio returns.

708.2. Illiquidity risk premiums compensate investors for the inability to access capital immediately and/or for the market's withdrawal of liquidity during a crisis. Andrew Ang details four different ways that an investor (asset owner) might capture or "harvest" the illiquidity premium. However, among these four, which is the simplest to implement and has the greatest impact on portfolio returns?

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Last updated: July 5, 2026 at 07:00

Dynamic rebalancing at the aggregate level

Market making at the individual security level

Holding less liquid securities within asset classes

Holding passive allocations to illiquid asset classes

Financial Risk Manager Part 2