The Benefits Of Alternative Investment Strategies In The Institutional Portfolio

Overview: This paper presents an empirical study of the performance of Alternative Investment Strategies (AIS: hedge funds and managed futures). The different strategy sectors within the universe of AIS are introduced along with their specific return, risk, and correlation characteristics. Furthermore, the effect of including AIS in a traditional portfolio of equity and bonds is illustrated with an efficient frontier analysis. The results present a strong case in favor of investment in a well-diversified pool of AIS, most effectively achieved within a properly managed multi-manager portfolio of a fund of funds. As AIS have come a long way to satisfy the needs of institutional investors. From transparency to liquidity, strategy diversification to risk management, the industry has advanced to such a stage that it nears recognition as its own asset class. The broad range of strategies and sectors in AIS investing demonstrate very attractive risk reward characteristics. Negative, zero and low correlations to traditional assets and to each other offer attractive capacities for diversification within the investor’s global portfolio. It is observed that the increasing demand for AIS products from institutional investors and the generally higher level of investor’s sophistication render the “black box” approach unsuitable. A focus on increased liquidity, transparency, and risk management will enable the industry to continue growing as rapidly as in recent years. The increased interest on the part of institutional investors has led to recognition that particular risks are being systematically addressed and to better awareness of the benefits of AIS in the institutional portfolio.

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Format: PDF | Size: 162KB | Date: Nov 2001 | Pages: 27