Expected Returns: An Investor's Guide to Harvesting Market Rewards

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Alternative asset premia

• Alternative asset classes improve portfolio diversification, at least in normal times, and may enhance returns.

• Alternative assets are often less liquid and less transparent than traditional assets.

• Alternative assets became increasingly popular in the 2000s, which inevitably reduced their prospective returns. In 2008—the quintessential bad times—most (but not all) alternatives failed both to diversify and to enhance returns.

• Real estate can be accessed directly through less liquid physical markets or indirectly through listed REITs and property stocks. The long-run return of real estate is between those of bonds and stocks, although starting valuations clearly matter. Long-run real price growth is negligible but rental yield income can be significant.

• Commodity futures are perhaps the best diversifiers of financial assets and also the best inflation hedges. Long-run average returns are more reflective of futures roll returns than of spot price appreciation. Oil-related futures have given the highest returns and have had the best diversification and hedging properties in recent decades.

• Hedge fund index data suggest that HFs have been able to add value, even as a group and after fees, unlike traditional managers. Critics question how much the documented outperformance reflects biases in reported fund returns (reflecting voluntary reporting to HF databases) or various risks (traditional and alternative betas, illiquidity, tail risks). I review ...