Alternatives

[LTD]

Hi,
is it right to say that all alternatives (except REIT and PE) provide very good diversification benefits for stock/bond portfolio
And
what about potential return enhancement? Since they almost all have negative skewness can we say they will enhance returns?

 

[cokemicho]

MMmmm no
Only PE is the exception, REITs does provide diversification.
Return Enhacement can be found in PE & Hedge Funds, PE is more a boost in return play than a diversification strategy.
No, since they almost all have negative skewness you cant say that, on the opposite, that is a not desirable characteristic of an investment, however they have diversification benefits.

 

[MrSmart]

Private Equity does as well.
Return enhancement is more subjective, no one tool provides more absolute returns per se. I guess Private Equity and MAYBE real estate have higher systematic risk overall. But they all have very high unsystematic risk, which makes their return on an individual basis look compartively high.

 

[MrSmart]

cokemicho wrote:
MMmmm no
Only PE is the exception, REITs does provide diversification.
Return Enhacement can be found in PE & Hedge Funds, PE is more a boost in return play than a diversification strategy.
No, since they almost all have negative skewness you cant say that, on the opposite, that is a not desirable characteristic of an investment, however they have diversification benefits.

Private equity diversifies, only hedged REITs provide good diversification in an equity heavy portfolio.

 

[cokemicho]

MrSmart wrote:

cokemicho wrote:
MMmmm no
Only PE is the exception, REITs does provide diversification.
Return Enhacement can be found in PE & Hedge Funds, PE is more a boost in return play than a diversification strategy.
No, since they almost all have negative skewness you cant say that, on the opposite, that is a not desirable characteristic of an investment, however they have diversification benefits.

Private equity diversifies, only hedged REITs provide good diversification in an equity heavy portfolio.

MrSmart thats kind of wrong, i mean the asset class (PE) does diversify but its not the role in the portfolio since the diversification benefit is marginal, i dont wanna be so rude but answering that it does may get you a wrong answer in the exam.
From the textbook: “Private equity probably can play a moderate role as a risk diversifier. However, many investors look to private equity investment for long-term return enhancement.” If CFA asks you about to choose which asset class is a return enhacer & poor diversifier the answer is PE
And talking about real estate, it provides diversification benefits almost always, REIT’s are not that effective when adding commodities & hedge funds, but its cool to have it to in a Stock/bond portfolio

 

[MrSmart]

cokemicho wrote:

MrSmart wrote:

cokemicho wrote:
MMmmm no
Only PE is the exception, REITs does provide diversification.
Return Enhacement can be found in PE & Hedge Funds, PE is more a boost in return play than a diversification strategy.
No, since they almost all have negative skewness you cant say that, on the opposite, that is a not desirable characteristic of an investment, however they have diversification benefits.

Private equity diversifies, only hedged REITs provide good diversification in an equity heavy portfolio.

MrSmart thats kind of wrong, i mean the asset class (PE) does diversify but its not the role in the portfolio since the diversification benefit is marginal, i dont wanna be so rude but answering that it does may get you a wrong answer in the exam.
From the textbook: “Private equity probably can play a moderate role as a risk diversifier. However, many investors look to private equity investment for long-term return enhancement.” If CFA asks you about to choose which asset class is a return enhacer & poor diversifier the answer is PE
And talking about real estate, it provides diversification benefits almost always, REIT’s are not that effective when adding commodities & hedge funds, but its cool to have it to in a Stock/bond portfolio

From that very same textbook:
“One of the common features of private equity investing is the high level of diversification potential due to the low correlation with traditional investment classes.”
REITs behave very much like equities, it is not a good diversification if your portfolio is significantly invested in equities. Unless you are talking about mortgage or hedged REITs, that would be more plausible.
I don’t wanna be so rude but answering that may get you a wrong answer in the exam

 

[cokemicho]

MrSmart wrote:

cokemicho wrote:

MrSmart wrote:

cokemicho wrote:
MMmmm no
Only PE is the exception, REITs does provide diversification.
Return Enhacement can be found in PE & Hedge Funds, PE is more a boost in return play than a diversification strategy.
No, since they almost all have negative skewness you cant say that, on the opposite, that is a not desirable characteristic of an investment, however they have diversification benefits.

Private equity diversifies, only hedged REITs provide good diversification in an equity heavy portfolio.

MrSmart thats kind of wrong, i mean the asset class (PE) does diversify but its not the role in the portfolio since the diversification benefit is marginal, i dont wanna be so rude but answering that it does may get you a wrong answer in the exam.
From the textbook: “Private equity probably can play a moderate role as a risk diversifier. However, many investors look to private equity investment for long-term return enhancement.” If CFA asks you about to choose which asset class is a return enhacer & poor diversifier the answer is PE
And talking about real estate, it provides diversification benefits almost always, REIT’s are not that effective when adding commodities & hedge funds, but its cool to have it to in a Stock/bond portfolio

From that very same textbook:
“One of the common features of private equity investing is the high level of diversification potential due to the low correlation with traditional investment classes.”
REITs behave very much like equities, it is not a good diversification if your portfolio is significantly invested in equities. Unless you are talking about mortgage or hedged REITs, that would be more plausible.
i don’t wanna be so rude but answering that may get you a wrong answer in the exam

thats an answer to a question in an EOC (which I did yesterday again) and its not the spirit of the play in the portfolio:
“What are the common features of private equity investing?”
and the question says:
29.Which of the following is the least appropriate response to Bolger’s first question?

1. High due diligence costs.
2. Limited diversification potential.
3. Complexity of valuation and assessment.

the answer is: B is correct. One of the common features of private equity investing is the high level of diversification potential due to low correlations with traditional investment classes
It is clear that this is an obvios answer (since it does diversify a little compared with other AI), but the text (not eocs) estates that PE is not a diversifier play in a portfolio its a return enhacer play, answer what you think is correct , anyway I hope someone else comments here because I dont want the person who made this post to get confused.

 

[Zeeshan Shafi]

My 2c.
Private equity have historically shown low correlation but it may be due to stale prices. Reading 24 page 37.
A VC with public equity market as its main exit route may hardly provide decent diversification in a traditional portfolio. The point to remember is Primary objective for PE is longterm enhancement rather than diversification.