The potential of alternative investments as an asset class: a thematic and bibliometric review

This case study provides new information about alternative asset fees to many institutional investors by tapping a relatively unknown data source: state pension fund annual reports. Examining the few state pension funds annual reports that track both fixed fees and carried interest fees of private equity funds and hedge funds, we find that average alternative asset fees were 2.48% of the relevant pension fund assets for the fiscal year ended June 30, 2017. In addition, as New Jersey provides the most detailed alternative asset data, this study discusses New Jersey pension fund’s private equity and hedge fund (a) returns, (b) fees, and (c) volatility, compared to verifiable and public benchmarks for the five years ended June 30, 2017. Both private equity and hedge fund portfolios underperformed the benchmarks, and the alternative asset industries’ claim of higher returns and lower risks than traditional assets is not supported in this study. To the degree that other state pension funds follow the same investment policies and controls as the state of New Jersey, this study concludes that state pension funds should reduce their holdings of alternative asset substantially. <b>TOPICS:</b>Pension funds, retirement, private equity, portfolio construction <b>Key Findings</b> • The New Jersey pension plan’s private equity fund and hedge fund portfolios (i) are reasonable proxies for both asset classes and (ii) are similar to those of other state pension funds. • PE five-year annualized returns (net of fees) were the same as the S&amp;P 500. Hedge fund returns were significantly below the 60–40 index and equivalent to LIBOR+5%. • PE return volatility was similar to the S&amp;P 500. HF volatility was greater than the 60-40 and LIBOR+5%. Average annual PE and HF fees were 3.29% and 3.08% respectively.

Private equity funds and hedge funds are both alternative asset classes that are continuously growing in importance. Although they have different focuses, they share some characteristics. First of all, both have or allegedly have a significant impact on the economy as well as the financial system they operate in. Therefore, the question of a potential regulation of both asset classes arises. Due to the lack of sophisticated knowledge about the differences of these asset classes, market players fear that attempts to regulate hedge funds will adversely affect private equity funds. Besides the regulatory issue, there are several other links between these two asset classes that have to be looked at. The relationship between those two asset classes is therefore of general importance. Last months‘ developments in the hedge fund industry (e.g. rumors about turbulences as well as hedge funds forcing the dismissal of the CEO of Deutsche Borse) have now even led to a broad public debate about private equity and hedge funds. At least in Germany the debate has been partly fueled by the fact that both types of funds are highly funded by institutional investors from abroad. Due to this the debate widened and included criticism on Anglo-Saxon style capitalism as well. In the light of the last German elections, hedge funds and private equity funds have even been compared to locusts, notorious for exhausting whole countries. However, the distinction between hedge funds and private equity funds remains very vague in this discussion, so that deep mistrust is spread among the public opinion against these new, mostly unknown and misunderstood types of investors. For this reason it is important to * discuss the arguments for or against regulation, * look at the major links between the two asset classes, * look at the major differences that exist between the asset classes, and * conceive a set of criteria to clearly distinguish between both types of funds. The purpose of this paper is to comment on possible solutions to the above mentioned tasks. It outlines preliminary thoughts and findings. Further, it comments on the steps that we think should be taken to further enhance perception of private equity funds as opposed to hedge funds from a public as well as a regulatory perspective.

Hedge funds, private equity investments, and other forms of alternative investments that offer the possibility of enhanced portfolio returns on a risk-adjusted basis have been available to sophisticated investors and institutions for many years. In the early 2000s, trillions of dollars of new investment funds that flowed into alternative investments and contributed to the bubbles of the 2004–2007 markets suffered proportionately when the bubble burst. Banks were attracted to and participated in the surge in alternative investments in many ways, as lenders, agents, and as principal investors in funds distributed to clients. The multiple exposures of banks to mortgage-backed and nonmortgage asset-backed securities, and to hedge funds and private equity funds caused them a high degree of distress, forced writedowns of assets, and compelled banks to raise additional capital. Consequently, many banks that were once active in alternative asset investments became much less so as the industry deleveraged and lost momentum. By 2010, only a few banks were still active as major players in this industry.

In July 2019, Bruce Miller, CEO of Investure, LLC (Investure), an outsourced chief investment office (OCIO), is preparing a proposal for Franklin and Marshall (F&M), a small liberal arts college located in Lancaster, Pennsylvania, with an endowment of $350 million. F&M recently began a search to find a new endowment manager in hopes of improving its investment returns and access to alternative assets (AA), such as private equity (PE) and hedge funds. Investure offers outsourced investment-management services to endowments and foundations (E&Fs) with assets less than $2 billion and is one of several companies competing to win the mandate to manage F&M's assets. Investure's approach is to pool the assets of like-minded institutions and significantly increase their allocations to PE. Miller and his team are preparing to meet with the F&M board's investment committee to describe Investure's services and approach to investment management.This case is designed to introduce students to AA and the distinctions among PE, hedge funds, and private capital within this asset class. It focuses primarily on why PE is a difficult asset class to manage and describes several channels available to small endowments like F&M to access PE. The case introduces students to the core vocabulary of PE investing and limited partnership agreements. To make the concepts and terms more concrete, it provides a simple exercise that asks the students to calculate the expected internal rate of return (IRR) on an investment made through a traditional limited partnership (primary fund commitment) and a fund of funds and compare those to Investure's approach. Students must evaluate and discuss the feasibility and attractiveness of each alternative to F&M. In doing so, the case creates an opportunity for students to discuss the current trends and issues many E&Fs confront as they attempt to increase allocations to PE.The case is appropriate for use in an introductory or early class in courses focusing on PE, venture capital (VC), and entrepreneurial finance, as well as in specialized courses for fund trustees interested in AA. The case can be used for the following purposes:1. To introduce students to AA and how they differ from public equities and fixed income.2. To introduce students to the core vocabulary of PE investing and limited partnership agreements.3. To introduce the channels of access to PE investment and evaluate the advantages and disadvantages of each.4. To analyze the returns to limited partners who choose to pursue PE investment under a traditional limited partnership and a fund of funds and compare those to Investure's OCIO model.5. To familiarize students with the current trends and issues motivating the growth in outsourcing of endowment management. Excerpt UVA-F-1971 Feb. 2, 2021 Investure, LLC: Investing in Alternative Assets In July 2019, Bruce Miller, CEO, of Investure, LLC (Investure), an outsourced chief investment office (OCIO), was reviewing the proposal his team would make in an attempt to gain its newest client, Franklin and Marshall College (F&M), a small liberal arts college located in Lancaster, Pennsylvania. F&M had recently started a process to select a new manager for its $ 350 million endowment. In learning more about F&M, Miller felt it was the kind of like-minded endowment and foundation (E&F) his firm targeted, but knew he would face stiff competition to win the mandate. Miller had been recruited to Investure shortly after its founder, Alice Handy, started the firm in 2003. At her previous position as CEO of the University of Virginia Investment Management Company (UVIMCO), Handy had produced a successful track record by increasing the endowment's investments in alternative assets, such as private equity (PE) and hedge funds. Together they had worked to land Investure's first client, Smith College, with a nearly $ 1 billion endowment in 2004. From there, the firm had grown to 12 clients and $ 14 billion in assets under management (AUM) (Exhibit 1). . . .

Islamic insurance, or Takaful, offers a Sharia-compliant alternative to conventional insurance, circumventing the prohibitions on uncertainty, interest, and speculation. This study presents a bibliometric review of 228 Takaful research articles from the Scopus database, using RStudio® for visualization from 1989 - mid 2023. The analysis encompasses science mapping techniques such as co-citation analysis, bibliometric coupling, word analysis, and trending topics on alternative investments. The findings reveal Malaysia as the leading nation in Takaful research, with significant contributions from International Islamic University Malaysia and Universiti Kebangsaan Malaysia. Prominent journals in this domain include the Journal of Islamic Accounting and Business Research, Journal of Islamic Marketing, and International Journal of Islamic and Middle Eastern Finance and Management. This study found the article entitled; “Establishing construct validity and reliability: Pilot testing of a qualitative interview for research in takaful (Islamic insurance)” written by Dikko (2016), as the most global cited document with 61 citations. Notably, the research focus has evolved from operational, shariah principles, and risk management to awareness, family Takaful innovations, micro-Takaful and relationship commitment. This study serves as a valuable resource for researchers, offering quantitative bibliometric insights and thematic analysis, and highlighting areas for future investigation.

Alternative assets are not always easy to describe. Before an asset class can be considered “alternative, ” the primary asset classes must be defined, and then what differs is considered “an alternative asset.” The bottom line is that alternative assets fall outside the scope of normal investment portfolios. They provide risk and return characteristics that are distinctly different from traditional portfolios of stocks and bonds. This provides not only excellent portfolio diversification, but also the ability to earn returns that may exceed that of stocks and bonds. However, access to alternative assets is less straightforward than it is to purchase stocks and bonds; therefore, alternative assets are often overlooked because they require more work to invest in than traditional asset classes. Keywords: asset class; hedge fund; private equity; capital assets; store of wealth; economic inputs; strategic asset allocation; tactical asset allocation; asset location; trading strategy; alternative beta

FALL 1999 O ften alternative investment strategies are lumped into two areas: managed futures and hedge funds. Investors have to be reminded that private equity, private debt, real estate, and credit derivatives all form part of the alternative to the long-only world of mutual fund stock and bond investments. In contrast to other books about the alternative investment firmament, this work directly provides insight into an array of alternative investment strategies. The book brings together chapters on private equity and private debt as well as what are commonly called skill-based investment strategies such as hedge funds, managed futures, and currencies, and provides detailed insight into developments affecting asset-backed securities, emerging market fixed-income debt, credit and insurance derivatives, and risk management within these strategies. More precisely, the book contains ten sections. In the introduction, the editor provides the wide range of questions surrounding alternative investments from an investor’s viewpoint. In the second section, on private equity and venture capital, two chapters represent the pertinent investment risks, liquidity, and regulatory issues. In the third section, the authors discuss skill-based strategies that include market-neutral investing, multimanager products, managed futures, commodities, and currencies. In the fourth section, three chapters address hedge fund performance as well as risk management issues. For instance, Chapter 12 provides a comparison of return patterns on traditional and alternative investments and concludes that hedge funds and CTAs have different trading styles and opportunities than the traditional stock and bond mutual fund managers. The fifth section on emerging markets addresses new techniques in emerging market fund management. In the sixth section, the authors introduce non-traditional types of asset-backed securities (ABS), which offer enhanced yield and well-managed, diversified risk, especially collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs). The seventh section contains three chapters presenting issues on insurance and credit derivatives. Insurance-linked securities and contingent capital are now firmly established and are expected to grow over the next few years, although the current softness of the reinsurance market may limit the number of issues. In the eighth section, credit arbitrage and creditand insurance-linked notes are discussed, as well as a range of new asset structures. The ninth section discusses regulatory environment issues, including marketing alternative investment funds and taxation of hedge funds. The final section contains three appendixes including an executive summary of a 1997 report on alternative Book Review

Practical Applications Summary In Alternative Asset Fees, Returns, and Volatility of State Pension Funds: A Case Study of the New Jersey Pension Fund from the Winter 2020 issue of The Journal of Alternative Investments, authors Jeff Hooke (Johns Hopkins Carey Business School), Carol Park (Maryland Public Policy Institute), and Ken C. Yook (Carey Business School) investigate whether state and municipal pension funds are benefiting from their increased investments in alternative assets. The authors focus on whether the performance of alternative asset funds is good enough to justify their relatively high fees. Examining the New Jersey state pension fund—whose annual reports provide the most detailed data—they find that its private equity (PE) and hedge fund (HF) holdings both underperform commonly used benchmarks, and its HFs’ performance is substantially correlated with that of publicly traded assets while also being more volatile. Therefore, the PE and HF performance and diversification qualities are not good enough to justify their higher fees. Also, those fees are inadequately reported due to a questionable “honor system” of fee reporting and a lack of auditing. For all these reasons, the authors recommend that pension funds substantially reduce their alternative-asset holdings. TOPICS:Pension funds, retirement, private equity, portfolio construction

Contents: Preface Introduction PART I: FOUNDATIONS 1. Hedge Funds - An Introduction Ludwig Chincarini 2. Europe's Hedge Fund Industry - An Overview Andrea Hankova and Franccois-Serge Lhabitant 3. Sovereign-wealth Funds - A Paradigm Shift in Capital Flows in the Global Economy Dilip K. Das 4. Private Equity Funds' Performance, Risk and Selection Ludovic Phalippou PART II: REGULATORY ISSUES 5. Alternative Investments and Retail Investors - A Bold but Risky Experiment Harry McVea 6. Hedge Fund Reporting Felix Goltz and David Schroeder 7. Hedge Fund Activism Alon Brav, Wei Jiang and Hyunseob Kim 8. Hedge Funds and the Detection of Managerial Fraud Veronika Krepely Pool 9. Self-regulation - What Future in the Context of Hedge Funds? Marco Lamandini 10. Hedge Fund Regulation through Competition Law Principles - Some Reflections David Harrison PART III: ALTERNATIVE INVESTMENT FUNDS - FAILURES AND FINANCIAL CRISES 11. Lessons of Long-Term Capital Management and Amaranth Advisors Mark Jickling 12. Hedge Funds and their Impact on Systemic Stability Maria Stromqvist 13. Sovereign Default Risks in the Economic and Monetary Union and the Role of Vulture Funds Peter Yeoh PART IV: COMPARATIVE PERSPECTIVES AND FUTURE PROSPECTS 14. US Regulation of Investment Advisers and Private Investment Funds - A Concise Overview Nathan Greene and John Adams 15. German Alternative Investment Fund Regulation - Wrong Answers to the Wrong Questions? Norbert Lang 16. Hedge Funds, Private Equity and Alternative Investment in Australia Alex Erskine 17. The EU's AIFM Directive and its Impact - An Overview Phoebus Athanassiou and Thomas Bullman 18. The Domestic Rooting of Financial Regulation in an Era of Global Capital Markets Thomas Oatley and W. Kindred Winecoff

Alternative investments — private equity, real estate and hedge funds — have natural advantages in risk and return over traditional stock and bond investments. A large allocation to alternatives relative to current institutional practice is needed for a material contribution an institutional investor’s bottom line. Investors should consider whether moving toward an Efficiency portfolio with an emphasis on low cost passive management, or an Opportunity portfolio with heavy reliance on value added through active management — especially alternative investments — is most appropriate for them. We argue that investors who can tolerate the cost, complexity and illiquidity should consider Opportunity-type allocations of 40% of their return-seeking assets to private equity, non-core real estate, and hedge funds. Success with traditional active investments is best found through conviction — rejection of “closet indexing” in its various forms.

Alternative investors have become much more prominent in the global financial ecosystem. Four of the most prominent categories include private equity (PE), hedge funds, sovereign wealth funds, and venture capital. Activist hedge funds are particularly focused on short-term returns; more controversial is whether such short term is damaging to the long-term good of corporates or not. As with private equity, they are most commonly limited partnerships, with relatively high investment criteria, and with a specified lock-up time frame. The chapter reviews key strands of the literature on both hedge funds and PE funds, and draw out the implications for theory. It discusses the relative research interest in hedge funds and PE funds by reference to data from Google Scholar. The chapter explains differences in hedge funds and PE funds in respect of performance, activism, and diversification. It offers some insights into regulation of both hedge funds and PE funds, and to the development of theory.

In an asset allocation process, correlations are particularly important if one includes 'alternative investments' such as real estate, commodities and hedge funds, which have been proclaimed to provide diversifying benefits within the overall portfolio context. While many studies have found that correlations between assets are time-dependent within each asset class, we focus on the correlations between asset classes to see if they change over time as a result of the business cycle. The technique of semi-correlation is used in order to differentiate asset class returns between up- and down-movements. We find that there are a number of assets for which correlations generally increase in down states (e.g. all types of equities). Hedge funds and balanced commodities also show substantially higher correlations to most other assets in down states. Furthermore, we find that gilts are the only asset class that becomes less correlated to most other assets during down markets, thus confirming their importance as a key diversifier in a multi-asset portfolio. Finally, once real estate indexes are adjusted to account for smoothing, we show that several correlation coefficients increase, suggesting that original time series may be overstating the benefits of diversification.

PurposeThis paper aims to review, systematize and integrate existing research on disposition effect and investments. This study conducts bibliometric analysis, including performance analysis and science mapping and thematic analysis of studies on disposition effect.Design/methodology/approachThis study adopted a thematic and bibliometric analysis of the papers related to the disposition effect. A total of 231 papers published from 1971 to 2021 were retrieved from the Scopus database for the study, and bibliometric analysis and thematic analysis were performed.FindingsThis study’s findings demonstrate that research on the disposition effect is interdisciplinary and influences the research in the domain of both corporate and behavioral finance. This review indicates limited research on cross-country data. This study indicates a strong presence of work on investor psychology and behavioral finance when it comes to the disposition effect. The findings of thematic analysis further highlight that most of the research has focused on prospect theory, trading strategies and a few cognitive and emotional biases.Practical implicationsThe findings of this study can be used by investors to minimize their biases and losses. The study also highlights new techniques in machine learning and neurosciences, which can help investment firms better understand their clients’ behavior. Policymakers can use the study’s findings to nudge investors’ behavior, focusing on minimizing the effects of the disposition effect.Originality/valueThis study has performed the quantitative bibliometric and thematic analysis of existing studies on the disposition effect and identified areas of future research on the phenomenon of disposition effect in investments.

Institutional investors have been steadily increasing their allocation to alternative assets in recent years. The alternative world currently comprises of about $3 trillion in assets and spans a wide variety of asset classes and strategies such as real estate, private equity, commodities and hedge funds. Many investors now view alternative assets as an effective solution to the mediocre performance of traditional assets. Is this shift into alternatives just creating another bubble? This article investigates whether the recent performance of alternative assets will continue to persist in the future. The analysis uses three signals to detect a bubble: excess returns, expensive valuation, and speculative activity. The results show that among commodities, energy demonstrates most evidence of being a bubble whereas non-energy commodities show less evidence. The results also show that hedge funds and private equity do not demonstrate much evidence of being a bubble. <b>TOPICS:</b>Real assets/alternative investments/private equity, commodities, private equity, financial crises and financial market history

As institutional interest in alternative asset classes such as private equity and hedge funds has grown, plan sponsors are confronted with difficulties applying traditional asset allocation models. Estimating the risk and correlation parameters of these asset classes is often less than straightforward. One culprit is the infrequent and appraisal-based pricing necessitated by investing in illiquid securities. This “stale pricing” can reduce the perception of volatility. In this study we apply a methodology for estimating true volatility and correlation in the presence of stale pricing to alternative investments. We also measure the impact of adjusting for stale pricing on asset allocation and the diversification benefits of private equity and hedge fund investments. We conclude that much of the perceived diversification benefits associated with allocating to private equities and hedge funds is attributable to stale pricing and thus illusory. Nonetheless, we observe that efficient portfolios still contain substantial allocations to alternative investments after adjusting for the effects of stale pricing.