Alternative Investments: Inflation Hedger or Mean-Variance Efficient?

Abstract

Using NCRIEF farmland and timberland smoothed indices over the period from 1992Q1 to 2012Q3 and a new de-smoothing approach offered by Fisher et al. (1994), we explore the mean-variance diversification features of farmland and timberland assets. Our empirical results show that diversification characteristics of both asset classes significantly improve the portfolio choice of the investors. Our de-smoothed series demonstrate that at a given level of risk both farmland and timberland have the potential to increase the returns of a diversified traditional asset portfolio during the period of market turmoil and high uncertainty. The results remain consistent even in a mirror image situation prevailing in the financial markets. Furthermore, both asset classes are found possessing weak inflation hedging characteristics during inflationary periods.