Discuss the methods available for setting the weight of alternatives in an asset allocation

Options range from simple to model-driven. Some investors hold none because of size, governance or liquidity limits. Heuristics, such as copying peer allocations or using a rule of thumb, are easy but ignore the investor's circumstances. Mean–variance optimisation can include alternatives, but inputs must be adjusted: unsmooth appraisal-based returns, include illiquidity, and cap allocations, since otherwise the optimiser overweights assets with understated risk. Monte Carlo simulation is well suited because it can model fat tails, spending, capital calls and distributions over many paths and show the probability of meeting goals. Risk-factor-based optimisation targets exposures to underlying factors and reveals overlaps with equities. Traps include feeding unadjusted private market data into optimisers.