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Alternative Assets and Strategic Allocation: Rethinking the Institutional Approach

Book Description

An insightful guide to making strategic investment allocation decisions that embraces both alternative and conventional assets

In this much-needed resource, alternative and portfolio management expert John Abbink demonstrates new ways of analyzing and deploying alternative assets and explains the practical application of these techniques.

Alternative Assets and Strategic Allocation clearly shows how alternative investments fit into portfolios and the role they play in an investment allocation that includes traditional investments as well. This book also describes innovative methods for valuation as applied to alternatives that previously have been difficult to analyze.

  • Offers institutional investors, analysts, researchers, portfolio managers, and financial academics a down-to-earth method for measuring and analyzing alternative assets

  • Reviews some of the latest alternatives that are increasing in popularity, such as high-frequency trading, direct lending, and long-term investment in real assets

  • Outlines a strategic approach for including alternative investments into portfolios and shows the pivotal role they play in an investment allocation

Using the information found in this book, you'll have a clearer sense of how to approach investment issues related to alternative assets and discover what it takes to make these products work for you.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Table of Figures
  5. List of Tables
  6. Acknowledgments
  7. Introduction
    1. What Is Alternative about Alternative Investments?
    2. The Plan of This Book
    1. CHAPTER 1 - Risk and Return
      1. The Three Sources of Investment Returns
      2. Directional Strategies
      3. Cash Flow Strategies
      4. Arbitrage Strategies
      5. Time, Return, and Risk
      6. Timing
    2. CHAPTER 2 - Return Enhancement
      1. Leverage
      2. Hedging
      3. Tactical Allocation
      4. Activism
      5. Accepting Liquidity Risk
      6. Volatility Generators
    3. CHAPTER 3 - Some Features of the Quantitative Toolkit
      1. Compounding and Volatility
      2. Statistical Significance
      3. Correlation
      4. Correlation and the Efficient Frontier
      5. Non-Normality
      6. The Sensitivity of Statistical Calculations to Outliers
    4. CHAPTER 4 - Risk Estimation
      1. Estimating Volatility
      2. Autocorrelation
      3. Investment Allocation Models and Alternative Investments
      4. Are We Theoretically Rudderless?
      5. Applying Theory to Practice
    1. CHAPTER 5 - Long/Short Equity
      1. Long/Short as an Investment Technique
      2. Long/Short Risk
      3. Long/Short in the Context of Conventional Portfolio Holdings
    2. CHAPTER 6 - Direct Lending
      1. Direct Lending as an Investment Technique
      2. Direct Lending Risk
      3. Direct Lending in the Context of Conventional Portfolio Holdings
    3. CHAPTER 7 - Merger Arbitrage
      1. Merger Arbitrage as an Investment Technique
      2. Merger Arbitrage Risk
      3. Merger Arbitrage in the Context of Conventional Portfolio Holdings
    4. CHAPTER 8 - High-Frequency Trading
      1. High-Frequency Trading as an Investment Technique
      2. Volatility Arbitrage
      3. Commodity Trading Advisors
      4. High-Frequency Trading Risk
      5. High-Frequency Trading in the Context of Conventional Portfolio Holdings
    5. CHAPTER 9 - Holding Private Assets for Their Cash Flows
      1. Holding Private Assets for Their Cash Flow as an Investment Technique
      2. The Risks of Holding Private Assets for Their Cash Flow
      3. Private Asset Cash Flows in the Context of Conventional Portfolio Holdings
    6. CHAPTER 10 - Fixed-Income Arbitrage
      1. Fixed-Income Arbitrage as an Investment Technique
      2. Fixed-Income Arbitrage Risk
      3. Fixed-Income Arbitrage in the Context of Conventional Portfolio Holdings
    7. CHAPTER 11 - Event-Driven Investment
      1. Event-Driven Investing as an Investment Technique
      2. Event-Driven Investment Risk
      3. Event-Driven Investing in the Context of Conventional Portfolio Holdings
    1. CHAPTER 12 - Investment Strategies in Practice
      1. Strategic Promiscuity
      2. Directional Investing
      3. Cash Flow Strategies
      4. Arbitrage Strategies
      5. Interaction among the Investment Strategies
    2. CHAPTER 13 - Optionality
      1. Diversification and Concentration
      2. Real Options
      3. Embedded Optionality
      4. Optionality and Diversification
      5. Optionality and “Alternativeness”
    3. CHAPTER 14 - Trade Capacity
      1. Inherently Bounded Trades
      2. Trades Bounded by Market Liquidity
      3. Trades Bounded by Valuation
      4. Boundaries Imposed by Practical Considerations
      5. Closing and Re-Opening
    4. CHAPTER 15 - Institutional Liquidity
      1. Liquidity Issues Relating to Alternative Investments
      2. How Liquid Are Alternative Investments?
      3. How Much Liquidity Does an Institution Need?
      4. Liquidity and Portfolio Structure
      5. Liquidity Premia
    5. CHAPTER 16 - Tactical Allocation
      1. Implications of This Treatment
      2. Tactical Allocation within an Alternative Investment Portfolio
      3. Tactical Allocation through Overlay Hedges
      4. Tactical Allocation between Alternative and Conventional Investments
    6. CHAPTER 17 - Portfolio Liquidity
      1. Correlations during Market Crises
      2. The Aftermath of the Recent Market Crisis
      3. The “Normal” Market “Habitat”
      4. Liquidity-Takers and Liquidity-Providers
    7. CHAPTER 18 - Alternative Investments and Information Theory
      1. Investment Strategies in Information“Ecologies”
      2. Information Vacua
      3. Additional Perspectives on Diversification
      4. Investment Strategies in an Environmental Context
      5. Information Efficiency
      6. Information Efficient “Ecologies”
    1. CHAPTER 19 - Classification of Investments
      1. A History of Asset Classes
      2. Some Proposals
      3. Categorization by Investment Strategy
      4. Classification Matrices
      5. Secondary Categories within a Strategy-Based Classification
      6. Classification by Factors
    2. CHAPTER 20 - Diversification among Strategies
      1. Investment Strategies and Portfolio Function
      2. Cash Flow Strategies
      3. Arbitrage
      4. Directional Strategies
      5. The Traditional Tools of Portfolio Construction
      6. Higher- and Lower-Order Allocation Decisions
    3. CHAPTER 21 - Multi-Dimensional Risk
      1. Risk within the Hierarchy of Investments
      2. Identification of Risk
      3. Opportunity Cost
      4. Tail Risk
    4. CHAPTER 22 - Filling Out the Allocation
      1. The Neutral Weighting
      2. Funding a New Allocation
      3. Exposure Parameters and Rebalancing
      4. Additional Policy Considerations
    5. CHAPTER 23 - Time and Tide
      1. Institutional Time Horizon
      2. Investment Time Horizon
      3. Timing and Time Horizon
      4. Timing and Tactics
      5. Investment Policymakers’ Involvement with Timing Questions
      6. Portfolio Termination
    6. CHAPTER 24 - Managing the Allocation Decision
      1. Governance and Investment Decision-Making
      2. The “Endowment Model”
      3. Outsourcing
      4. Hedge Fund Replication
      5. Up and Down the Decision Hierarchy
    7. CHAPTER 25 - Concluding Remarks
      1. Additional Benefits from Alternative Investment?
      2. Alternative versus Conventional Investments
      3. Contrarian Investment Policy
  12. Bibliography
  13. Index