Does anyone have a good summary page of the effects various Alternative INvestments (Hedge Funds, Real-Estate etc) have on Portfolio Returns, Risk and Sharpe Ratio? In addition, I noticed information spread throughout the readings on how the Sharpe Ratio is not appropriate for some of these AI’s but wasn’t sure if that applied to all of them for various reasons or only a few of them. Any clarification on this would be great. Thanks PJStyles
Let me try. Sharp ratio is not appropriate for AI for the following reason (assumptions) 1. Sharp ratio assume a normal distribution (not the case with hedge fund, using options) 2. Sharp ratio assumes the portofilo holdings are liquid (not the case with PE) 3. Sharp ratio number can be “gamed”, meaning that it is the excess over rfr over std. However, std can be better (smaller) over a longer period of time. Somebody help me to think other reasons, I think there are more.
Alternative investments may have smoothed returns, hiding actual volatility.
I can seriously view this as a good item set question where it asks about the various different alternative investments and their impact on portfolio return, risk and sharpe ratio and then tie in when/where the sharpe ration may not be appropriate. Wish it was summarized better in both the CFAI and SChweser notes but it’s not. As far as liquidity mentioned above, isn’t liquidity a concern for pretty much all alternative investments with perhaps the exception being Indirect Real-Estate (REITS) and Managed Futures?
Anyone else feel like chiming in on this topic?
COmmodities and Reits are the execptions to the other asset classes in that they have more liquidity. Here si my take on the retrurn enhancement and risk diversification effect of each class. I am foggy on a few things so feeback appreciate. REAL ESTATE -Principally a diversifer because reacts to macro changes differently than stocks or bonds. Direct investments better diversifiers than REITS. Also higher risk-adjusted return because real estate is less volatile (infrequent pricing) -Return - I feel there is something I am mising here. On one hand CFAI says Real Estate acts as a diversifier because it reacts to macro changes differently than stocks and bonds, however it then says real estate may folow ecnomic cycles so can act as returns enhancer. I think the difference may be REITS vs direct real estate asset ownership. PRIVATE EQUITY -Principally a retrun enahncer, less of a diversifier. Less of diversifier because has higehr correlation with oberall stock market. - CFAI also says 5% target allocations to PE is commonplace -The books do make disticntions beteen early-stage money and LBO money. Basically early-stage is riskier, higher potential profit compared to LBO COMMODITIES - Chiefly act as a diversifier, correlations betweens stock and bonds is low, sometimes negative. -Important tomention it is an inflatoin. Book also makes distcintion between stroable commodities (precious) metals and non-storable commodities (ag). Also link to ecnomic activity, ie energy will be more tied to ecnomic activity and thus inflation, -Retruns - up uuntil recently, return has been lower than stocks and bonds but that has chnaged after the commodity run over past few years. HEDGE FUNDS - Since they vary in style so much, book does not pin down how they act as a retrun enhancer or diversifier, especially because risk is hard to measure. Does anyone have any more color here? MANAGED FUTURES -Main idea here is that managed futures act as a diversifier because they can have exposure to unique risk factors that straight stocks and bonds can’t. What those are, I am nt exactly sure, maybe just market-neutral type exploiting of mispricings. DISTRESSED SECURITIES - ??? I think this sectoin is poorly done in Scheweser and all over the place in CFAI.
ChiTownShane Wrote: ------------------------------------------------------- > MANAGED FUTURES > -Main idea here is that managed futures act as a > diversifier because they can have exposure to > unique risk factors that straight stocks and bonds > can’t. What those are, I am nt exactly sure, > maybe just market-neutral type exploiting of > mispricings. > the uniqueness might be rooted at the reality that MFs implement their strategies primarily at derivate markets instead of cash markets. one thing i can think of is that they could be a lot more vol driven than fundamental driven.
Hmm… not sure where managed futures get their extra benefits. Futures traders can play interest rate games that don’t affect the underlying (assuming they are stocks or commodities) as much. There may be differences in the liquidity of futures vs spot prices. And then there are presumably things that can be done in the futures markets that can’t be done in spot markets because spot markets may have higher transaction costs. Possibly there are extra opportunities because some futures prices are fixed by arbitrage rules. If you have a model of expected future spot prices that works well, you can make a profit because those futures aren’t actually trying to predict spot prices, but merely the cost of carry plus expenses.
the book mentioned the following: “managed futures have a negative correlation with cash market portfolios when cash markets post negative returns, and positively correlated when cash market reported significant positive returns”. so, it’s like you have a put in your portfolio.