The Relative Merits of Alternative Investments in Passive Portfolios

TLDR

We have content for each. Background: two sentences: "Should optimal passive portfolios include allocations to commodities, volatility, hedge funds and private equity?" and "What is the most attractive path to an investment in hedge funds: single manager hedge funds, fund of hedge funds (FoHF) or investable hedge fund indices (IHF)?" Summarize field context: alternative investments in passive portfolios, question of optimal allocation. Purpose+Mechanism: one sentence: "This article addresses these questions using a methodology similar to Black‑Litterman that combines views on the performance of various alternative investments with the market implied forecast for three traditional assets: bonds, equities and real estate." That covers purpose and mechanism. Findings: multiple sentences: "Assuming persistence of recent performance of alternative investments, the results indicate that it would be optimal to tilt the global market portfolio towards single manager hedge funds, commodities and private equity and away from traditional assets." Also "The extent of the tilt depends on the degree of credibility assigned to one’s views." Also "From a methodological viewpoint, the empirical findings are dependent on both the choice of consideration set for alternative investments and the views expressed about its future performance." Need to condense into one sentence. Combine: "The study finds that, assuming recent performance persists, optimal passive portfolios tilt toward single‑manager hedge funds, commodities, and private equity while away from traditional assets, with the magnitude of the tilt depending on the credibility of the views and on the chosen set of alternative investments considered." That covers all.

Abstract

Should optimal passive portfolios include allocations to commodities, volatility, hedge funds and private equity? What is the most attractive path to an investment in hedge funds: single manager hedge funds, fund of hedge funds (FoHF) or investable hedge fund indices (IHF)? This article addresses these questions using a methodology similar to Black-Litterman that combines views on the performance of various alternative investments with the market implied forecast for three traditional assets: bonds, equities and real estate. Assuming persistence of recent performance of alternative investments, the results indicate that it would be optimal to tilt the global market portfolio towards single manager hedge funds, commodities and private equity and away from traditional assets. The extent of the tilt depends on the degree of credibility assigned to one9s views. From a methodological viewpoint, the empirical findings are dependent on both the choice of consideration set for alternative investments and the views expressed about its future performance. <b>TOPICS:</b>Real assets/alternative investments/private equity, passive strategies, portfolio construction, performance measurement