Active Alpha: A Portfolio Approach to Selecting and Managing Alternative Investments

Overview

With significant assets currently committed to alternativeinvestments, it's clear to see that serious investors—bothinstitutional and high-net-worth individuals—are extremelyinterested in adding these types of investments to theirportfolios. But in order to properly integrate today's alternativeinvestments into a portfolio of traditional asset classes, it isprudent to follow a portfolio construction methodology thatincludes factor analysis.

Nobody understands this better than ...

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Overview

With significant assets currently committed to alternativeinvestments, it's clear to see that serious investors—bothinstitutional and high-net-worth individuals—are extremelyinterested in adding these types of investments to theirportfolios. But in order to properly integrate today's alternativeinvestments into a portfolio of traditional asset classes, it isprudent to follow a portfolio construction methodology thatincludes factor analysis.

Nobody understands this better than author Alan Dorsey. Over thecourse of his successful financial career, Dorsey has skillfullyrefined his approach to selecting and managing alternativeinvestments. And now, with Active Alpha, he shares these essentialexperiences.

Divided into two comprehensive parts, Active Alpha is filledwith cutting-edge material mixed with sage advice on alternativeinvestment trends in the world of portfolio management. In PartOne, you'll become familiar with organizational and implementationissues—such as governance and gaining access to the bestfunds—that arise when dealing with alternative investments.Along the way, a variety of alternative investment strategies areintroduced, including hedge funds, private equity, real estate,currencies, commodities, timber, and oil and gas. Chapters thatpertain to a specific type of alternative investment detail thebasic attraction of each as well as the qualitative return driversthat tend to affect them. Approaches for each strategy arecarefully presented, along with various tactics, substrategies, andforms of fund. Rounding out the discussion of each alternativeinvestment are considerations for the construction of portfoliosdedicated solely to each one.

Part Two of Active Alpha moves on to address the use ofalternative investments in traditional portfolios. Important issuescovered here include the migration of hedge funds into the realm ofprivate equity, alternative investment cash flow and itsimplications for portfolio rebalancing, the use of leverage, andportable alpha techniques. Factor analysis is also closelyevaluated through an in-depth discussion of the basic supportingmethodologies and quantitative building blocks that underpin factoranalysis when applied to investment management, and a quantitativeillustration of factor analysis as applied to the major strategiesfor hedge funds, private equity, real estate, currencies,commodities, timber, and oil and gas.

Written in an engaging and informative style, Active Alpha showshow to analyze factors associated with alternative investments,identify true sources of Alpha, and create well-balanced portfolioswith accurately measured risk exposures.

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Product Details

  • ISBN-13: 9780471791324
  • Publisher: Wiley
  • Publication date: 8/3/2007
  • Series: Wiley Finance Series, #356
  • Edition number: 1
  • Pages: 384
  • Product dimensions: 6.12 (w) x 9.51 (h) x 1.32 (d)

Meet the Author

ALAN H. DORSEY is a Managing Director and Alternative Investment Strategist at Lehman Brothers. He is cohead of Portfolio Advisory for the Private Investment Management group that serves Lehman's high-net-worth clients and head of Portfolio Strategy for multi-asset class institutional portfolios with a focus on alternative investments. Prior to joining Lehman Brothers, Dorsey was managing director and director of non-traditional investments and research at RogersCasey, a leading consultant to pension funds and other institutional investors. He holds a BA in economics from Wesleyan University and is a Chartered Financial Analyst. Since 1997, Dorsey has served as a member of the investment committee for Wesleyan University, where he is a past trustee. He became a trustee for the Lehman Brothers defined benefit pension plan in 2007.

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Table of Contents

Preface.

Acknowledgments.

About the Author.

Part One. Alternative Investments and Investors.

Chapter 1. Introduction.

Integration of Alternative Investments and Traditional AssetClasses through Factor Analysis.

Approaches to Portfolio Construction.

The Identification of Alpha and Beta in New InvestmentStrategies.

What the Future Holds.

Summary.

Chapter 2. Investors in Alternative Investments and theNecessary Ingredients for a Successful Program.

Types of Investors and Their Approaches to AlternativeInvestments.

The Necessary Ingredients for a Successful AlternativeInvestment Program.

Support from Investment Management Firms and Consultants.

Investors Deciding To Minimize the Use of AlternativeInvestments.

Summary.

Chapter 3. Hedge Funds.

Performance and Diversification Attributes.

Market Segmentation.

Hedge Fund Strategies.

The Construction of a Segregated Portfolio of Hedge Funds.

Summary.

Chapter 4. Private Equity.

Performance and Diversification Attributes.

Dispersion of Returns.

Private Equity Strategies.

The Construction of a Segregated Portfolio of PrivateEquity.

Summary.

Chapter 5. Real Estate.

What Is the Attraction?

Real Estate Strategies.

The Construction of a Segregated Portfolio of Real Estate.

Summary.

Chapter 6. Currency, Commodities, Timber and Oil & Gas.

The Qualitative Determinant of Returns.

The Attraction of Currency.

The Attraction of Commodities.

Currency and Commodity Strategies.

The Attraction of Timber.

Timber Strategies.

The Attraction of Oil & Gas.

Oil & Gas Strategies.

The Construction of a Segregated Portfolio of Currencies,Commodities, Timber and Oil & Gas.

Summary.

Part Two. Alternative Investments in TraditionalPortfolios.

Chapter 7. The Migration of Hedge Funds into the Private EquityRealm.

Are Hedge Funds Gaining Market Share from Private Equity?

How Well Suited Are Hedge Funds To Private EquityInvestments?

The Power of Compounding. A Comparative Advantage for PrivateEquity.

The Fee Differential between Hedge Funds and Private Equity.

Alternative Investment Fee and Term Components.

Summary.

Chapter 8. Cash Flow Forecasting and its Implications forRebalancing.

Alternative Investment Cash Flow.

Asset Allocation. Achieving Policy Targets and Rebalancing.

Cash Flow Forecasting Tools.

Portfolio Rebalancing Tools.

Summary.

Chapter 9. Leverage and Portable Alpha.

Leverage.

Portable Alpha.

What Is Portable Alpha?

The Benefits and Issues with Portable Alpha.

Reevaluating the Premise for Portable Alpha.

The Use of Hedge Funds in Portable Alpha.

Alternative Thinking about Alpha.

Summary.

Chapter 10. Factor Analysis. The Rationale.

Marketplace Changes That Warrant Factor Analysis.

The Asset Class Concept.

Alternative Investments and Factor Analysis.

Problems with Selecting Vehicles for Alternative InvestmentPortfolio Construction.

Quantitative Building Blocks.

Risk Budgeting Using Factors.

Beyond Traditional Asset Class Risk Budgeting.

Qualitative Independent Variables.

Illiquidity Factor.

Summary.

Chapter 11. Factor Analysis. The Findings and Discovering ActiveAlpha.

Time Series Delineation and Issues.

Mean Variance Optimization.

Problems Using Mean Variance Optimization with AlternativeInvestments.

Regression Analysis with Alternative Investment Factors.

Regression Analysis Results and Observations.

Problems with Conducting Regression Analysis on AlternativeInvestments.

Factor Optimization.

Active Alpha vs. Passive Alpha.

Problems with Factor Optimization.

Synthetic Portfolios of Alternative Investments.

Factor Measurement and Risk Monitoring.

Summary.

Appendix. Regression Methodology.

Notes.

Glossary.

References.

Index.

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