Portfolio Design: A Modern Approach to Asset Allocation

EXPANDING THE MENU OF ALTERNATIVE ASSETS

In earlier chapters, several different types of alternative investments were discussed in detail, among them hedge funds, commodities, and private equity, along with real estate. This section will analyze how these alternative assets help to diversify the portfolio. Several portfolios containing conventional and alternative assets will be examined.

In addition to the FTSE NAREIT index discussed in the last section, the indexes chosen are as follows:

Hedge funds: the HFRI Fund of Funds Index and Credit Suisse/Tremont Hedge Fund Index. The HFRI index begins in 1990 while the Credit Suisse/Tremont index begins in 1994.5

Commodity futures: the Dow Jones UBS Commodity Index. As discussed in Chapter 12, this index limits the weight of any individual commodity to 33 percent of the index, so it is a more representative index than the Goldman Sachs Commodity Index (which is dominated by energy). The DJ UBS index begins in February 1991.

Venture capital: the Cambridge Associates LLC U.S. Venture Capital Index®. This index begins in the second quarter of 1981.

Private equity: the Cambridge Associates LLC U.S. Private Equity Index®. This index, which begins in the second quarter of 1986, consists primarily of buyout funds.

It should be noted that some of these indexes for alternative investments are quite different from the stock and bond indexes used in a conventional indexed portfolio. First, unlike the DJ AIG commodity futures index, which measures ...