Alternative Assets : Investments for a Post-Crisis World (Hardcover)

Preface xi

Acknowledgements xv

1. What are Alternative Assets? 1

Illiquid 2

Unquoted 2

Non bonds or equities 3

Are alternative assets really “alternative”? 3

Thoughts on classification 6

Private assets 6

Commodity type assets 9

Volatility and valuation issues 10

Time horizons 12

Global Tactical Asset Allocation (GTAA) 13

An alternative way of accessing conventional assets? 15

What we will be considering 16

Summary 17

2. Investing in Alternative Assets 19

Why should we invest in alternative assets? 19

The traditional worldview 20

Risk (volatility) 20

Liquidity 22

Problems posed by the traditional world view so far as alternative assets are concerned 23

The tail wags the dog 23

The parallel universe of pension funds 24

Volatility as risk 25

Liquidity 27

How much liquidity do you really need? 28

The illiquidity premium 29

Problems with liquidity 30

The stock market goes supernova 31

Liquidity and volatility 31

Liquidity and correlation 32

Extending the efficient frontier 33

Correlation 35

Active and passive investing – beta and alpha 37

The rationale for alternative assets 40

Summary 41

3. Real estate 43

Real estate beta 45

Real estate exposure 46

Direct 47

Quoted 48

Quoted (1): property companies 48

Quoted (2): REITS 49

Quoted (3): ETFs 50

Unquoted (1): unlisted property funds 50

Unquoted (2): private real estate 53

Synthetic 57

Summary 61

4. Energy 63

Spot trading 64

Influences on pricing 65

Untapped reserves 65

The (US) strategic petroleum reserve 65

Production and growth in oil hungry economies 65

Weather 66

Political factors 66

Terrorism 67

The US dollar 67

Accessing oil as an investment 69

Investing in the shares of oil companies 69

Synthetic exposure 71

Oil ETFs 73

Bio-fuels 75

Natural gas 77

Oil and gas royalties 79

Energy as an investment 82

Summary 83

5. Private Equity 85

Private equity – definition and types 85

Buyout 86

Drivers 87

History and development 88

Development capital 89

Characteristics 89

Minority shareholder protection 90

Deal types 91

Growth capital 91

Venture capital 92

Venture returns and home runs 94

Mezzanine 95

Quoted private equity 95

Private equity funds 97

Private equity returns 99

The J-Curve, IRRS and multiples 100

Vintage year returns 102

Funds, funds of funds and secondaries 102

Concluding thoughts on private equity 103

Summary 105

6. Hedge Funds 107

Introduction 107

Use of derivative instruments 108

Leverage 110

Some common elements 112

Legal structure 112

Type of trades 113

Lack of transparency 113

How hedge funds invest – an overview 114

Long and long/short 114

Credit based 116

Global macro 117

Specific strategies 117

Long only 118

Long/short 118

(Equity) market neutral 118

Convertible arbitrage 118

Statistical arbitrage (“stat arb”) 119

Merger arbitrage 120

Fixed income arbitrage 120

Global macro 121

Event driven 121

Distressed 121

Fund of funds 122

The hedge fund model – pros, cons and the future 123

Redemption/co-investor risk 125

Some final thoughts on hedge funds 126

Summary 127

7. Infrastructure 129

What is infrastructure? 131

Secondary and primary infrastructure 132

Regulated and demand-driven 133

Drivers 133

Government 134

Investors 134

Industry 134

Threats 135

Regulatory/governmental 135

Funding 137

War and terrorism 137

Quoted and unquoted infrastructure 138

Quoted infrastructure (1): industrial companies 138

Quoted infrastructure (2): listed investment vehicles 140

Unquoted infrastructure (1): projects (typically PFI or PPP type) 143

Unquoted infrastructure (2): funds 144

Returns 145

Summary 146

8. Commodities 147

What are “commodities”? 148

How can we classify commodities? 149

Soft commodities 149

Hard commodities 150

What are the return drivers? 151

Commodities beta 152

Prices and indices 152

Is it investable? 153

US dollar currency risk 155

Are they representative? 156

Counterparty risk 158

Renewal effect 160

Commodity returns 161

What can be stated? 162

What other factors are relevant? 163

The case for commodities 164

Summary 165

9. Gold 167

Introduction 167

Inflation 168

Gold as a safe haven 169

Gold as a hedge against US dollar weakness 172

Gold as a diversifier 172

Returns 173

Gold doesn’t have babies 174

Fixing the gold price 175

How to invest in gold 176

Gold shares 177

Physical ownership 178

Synthetic ownership 180

Indirect ownership 182

Summary 183

10. Active Currency 185

How can an investor make money by investing in currency? 187

Are the currency markets a zero sum game? 188

Institutional approaches 190

Risk management 190

Active currency 192

Liquidity 193

Volatility 193

Correlation 194

Active currency strategies 194

The carry trade 195

Momentum/trend investing 196

Value investing 197

Active currency beta 199

What is the beta measure we are discussing? 199

What is the methodology? 200

Is the DBCR investable? 202

Final Considerations for Active Currency 203

Summary 203

11. Other Alternative Assets 205

Forestry 208

Returns and correlation 208

Direct and indirect forestry 209

Gem stones 210

Works of art 212

Musical instruments 213

Antiques 214

Wine 215

Classic cars 218

Other collectables – coins, medals, stamps, militaria, snuff boxes, perfume bottles, etc. 220

Yet more …? 221

Conclusion 222

Summary 223

Index 225