Authors: Garyfallia Vakountouzi, Evangelos Manouvelos

Title: Assessing alternative investments portfolios: Comparative valuation of Commodities, Private Equity and Real Estate versus Hedge Funds, Managed Futures and Distressed Securities

Abstract

Alternative investments are non - conventional investment types held primarily by institutional investors or accredited, high-net-worth individuals. This paper aims to evaluate the performance of portfolios that include traditional alternative investments versus portfolios that incorporate modern alternative investments.

As traditional alternative investments we examine Commodities, Private Equity and Real Estate. As modern alternative investments we consider the new generation of funds: Hedge Funds, Managed Futures and Distressed Securities. Investors’ characteristics (individual and institutional) and their respective profiles determine the allocation of alternative investments in their portfolios.

Portfolios performance differentiation with inclusion of traditional alternatives versus modern ones are presented. Five different investment profiles are examined on this respect: Defensive, Fixed Income, Balance Growth, Moderate Growth and Aggressive. Balanced investors tend to keep positions in alternative investments at higher levels versus both conservative and aggressive profiles in order to maximize diversification.

Portfolio Construction is performed using optimization by two factors: maximizing Sharpe ratio and minimizing variance.

Examining the period 2000 - 2017 portfolios with traditional alternatives had better returns compared to those with modern alternatives. Regarding the period March 2000 – September 2002 all portfolios had negative returns, due to widespread selloff, yet portfolios consisting solely of alternatives managed to have positive returns.