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Family Wealth Management: Seven Imperatives for Successful Investing in the New World Order by Tom McCullough, Mark Haynes Daniell

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Chapter 17

Assessing Alternative Assets and the Search for Recurring Alpha

Alternative assets provide an alternative to the more traditional classes of cash, stocks, and bonds. For years, these alternative asset classes were open only to ultra-high-net-worth individuals and sophisticated institutional investors.

For many years in the past, and likely to be for many years yet to come, effective strategies in the alternatives space have been the source of portfolio alpha for many wealthy families. In the “core and satellite” model described previously, it was often alternatives that provided portfolio alpha from the smaller “satellite” investing.

Over the past 10 to 15 years, alternative assets have come into more common usage as the traditional asset classes, equities in particular, have lagged historic performance and yields on bond investments have steadily declined.

Although alternatives, or at least selected asset classes in selected time frames and some elite managers, have proven themselves capable of producing consistent and recurring alpha for their investors, not all alternative asset classes and not all alternative asset managers have been so successful.

In this area, as in so many others, the rules of the game are changing as investment theses, leverage strategies (and availability), and fee arrangements (which can have a significant impact on after-fees-and-carry returns to investors) have all been tested in the global financial crisis (GFC), and many have been found ...

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