The choice set in the alternative investment space has grown, so investors need to think through the widening set of opportunities. The opportunities are not just based on strategies or risk factors, but on the broader mechanisms for delivering strategies.
The alternative space can be divided into real assets, hedge funds,s and alternative risk premia. Other categorizations are possible; however, this may be a helpful approach for discussion. Real assets will represent direct investments in non-traditional assets such as private equity. Hedge funds represent managed liquid alternatives, including discretionary or systematic strategies. Alternative risk premia (ARP) can be accessed through total return index swaps or investments tied to specific risk premia or factor strategies.
The stars in our table below indicate which alternative, real, hedge fund, or ARP has an advantage for investors across several criteria. There can be wide dispersion within each category; however, we are providing some general observations on relative merits.
Correlation with equity market risk suggests the level of diversification achievable in each category. Given the strategy focus of an alternative risk premium, there can be greater diversification benefit. Investors can choose a specific level of diversification that may not be available with real assets or hedge funds, where managers choose the level of diversification.
The liquidity terms for an ARP swap may be superior to hedge funds and real assets. Hedge funds may not provide daily liquidity, and real assets such as private equity may be less liquid.
ARP swaps based on risk-premium index strategies or factors provide full transparency; however, the index terms will not change. Hedge funds may have limited transparency based on reporting requirements. Private equity may have known investments, although they are subject to limited disclosure.
Pricing is superior for ARP, as values are usually posted daily. Real assets may not have daily pricing, and year-end prices for private equity may be subject to interpretation. Hedge fund pricing is sensitive to the liquidity of the underlying assets held in the portfolio.
Return and volatility ratings for each category are complex. ARPs have daily pricing, which may make calculating return and risk straightforward, but these measures will be subject to significant noise based on daily variation. Return and risk will vary widely based on the risk premia held. Return and risk are usually smoothed for real assets. Hedge funds will have less smoothing but will be subject to net asset value fluctuations.
The alternative space can be divided into real assets, hedge funds,s and alternative risk premia. Other categorizations are possible; however, this may be a helpful approach for discussion. Real assets will represent direct investments in non-traditional assets such as private equity. Hedge funds represent managed liquid alternatives, including discretionary or systematic strategies. Alternative risk premia (ARP) can be accessed through total return index swaps or investments tied to specific risk premia or factor strategies.
The stars in our table below indicate which alternative, real, hedge fund, or ARP has an advantage for investors across several criteria. There can be wide dispersion within each category; however, we are providing some general observations on relative merits.
Correlation with equity market risk suggests the level of diversification achievable in each category. Given the strategy focus of an alternative risk premium, there can be greater diversification benefit. Investors can choose a specific level of diversification that may not be available with real assets or hedge funds, where managers choose the level of diversification.
The liquidity terms for an ARP swap may be superior to hedge funds and real assets. Hedge funds may not provide daily liquidity, and real assets such as private equity may be less liquid.
ARP swaps based on risk-premium index strategies or factors provide full transparency; however, the index terms will not change. Hedge funds may have limited transparency based on reporting requirements. Private equity may have known investments, although they are subject to limited disclosure.
Pricing is superior for ARP, as values are usually posted daily. Real assets may not have daily pricing, and year-end prices for private equity may be subject to interpretation. Hedge fund pricing is sensitive to the liquidity of the underlying assets held in the portfolio.
Return and volatility ratings for each category are complex. ARPs have daily pricing, which may make calculating return and risk straightforward, but these measures will be subject to significant noise based on daily variation. Return and risk will vary widely based on the risk premia held. Return and risk are usually smoothed for real assets. Hedge funds will have less smoothing but will be subject to net asset value fluctuations.
The choice of where investors obtain diversification involves a number of general trade-offs. ARP swaps offer more flexibility, transparency, and liquidity but place more management responsibility on the manager.
No comments:
Post a Comment