Alternative Investment Returns and Diversifications

Real Estate:

1. Direct: owns lands etc (more diversified, lower return)
2. Indirect: real Estate Investment Trust REIT – public traded shares in real estate portfolio (less diversified, higher correlation to the market, enhanced return)

Private Equity:

VC has lower transparency than buyout funds

Move with stock

Have idiosyncratic risk so can provide moderate diversifications

In last 20 years has higher return than stocks and bonds

Commodities:

Low correlation to market, +ve to inflation (except agricultural)

Lower return than stocks and bonds but good diversification (increases Sharpe ratio)

Hedge Funds:

Recent years, better than stock but worse than bonds

Managed Futures:

Similar to Hedge funds

Distressed Securities:

High return (but very negatively skewed, cannot use Sharpe ratio)

Even-driven, so uncorrelated to the market