Benefits of adding alternative investments

This is what I have gathered when added to traditional porfolio (bonds and equities): Infrstructure funds: lower return with lower risk Private equity: higher return with similar risk Commodities: Similar return with lower risk (postive skewedd returns?) Distrssed debt: Higher return and lower risk Managed futures: Similar return and similar risk (?) Real estate: Similar return and lower risk

distressed debt is higher return, higher risk and low correlation (-ve skewness)

Agree on a stand alone basis. But when added to the porfolio it has great diversificaiton benefits (negative correlation with both equity and bonds)

I don’t think this can be put as simple rules of thumb! especislly when it comes to return measurement as this is time period dependent CFAI uses 1990 - 2004 performance measurment and also 2000 - 2004 for measurement of most recent performance. Key is to understand the diversification benefits primarily from lower correlations and relative risk adusted performance. You also need to understand the characteristics of the indices used plus potential biases (easy place for CFAI to throw you a curve ball) e.g smoothed NCREIF and unsmoothed NCREIF for direct real estate. GSCI for commodities (note that this underperforms on equity and bonds between 1990 - 2004 but outperforms equity between 2000 - 2004). Also, absolute return strategies in hedge funds have no benchmarks (sometimes use hurdle rates as benchmarks). Hedge fund composite index (HFCI) also relies on data from managers which has biases such as survivorship and backfill biases and also prone to stale prices. Also their returns tend to be non normal hence standard deviation as a measure of risk is not relevant. Good point on Distressed debt. in addition to skeweness, they also have high kurtosis (higher frequency of extreme events observed) again, my point is this is not clear cut to simply use rules of thumb! THE DEVIL IS IN THE DETAIL

Liquidity is another thing to think about when considering alternatives. In the case of an individual IPS - indirect commodity exposure and REITs are the 2 asset classes with similar liquidity to an equity/bond portfolio. But clearly the diversification and risk-adjusted returns are very much in favor of adding alternative investments to a traditional bond/equity portfolio.