Active Alpha A Portfolio Approach to Selecting and Managing Alternative Investments

by Dorsey, Alan H.

• ISBN13: 9780471791324
• ISBN10: 0471791326
• Edition: 1st
• Format: Hardcover
• Copyright: 2007-08-03
• Publisher: Wiley

Summary

Praise for Active Alpha "Active alpha is the quest for every sophisticated investor. This book covers all of the key alpha sources currently mined by active managers, reduces the complexity of the subject, and helps the investor get started in the right direction." -Mark Anson, Chief Executive Officer, Hermes Pensions Management Ltd. "Long-held traditional methods for investing large portfolios are giving way to new processes that are designed to improve productivity and diversification. These changes find their locus in the sometimes overly mysterious world of absolute return strategies. In this book, Alan Dorsey demystifies that new world and provides a guiding pathway into the future of professional portfolio management. This is an important read for any investor who plans to succeed going forward." -Britt Harris, Chief Investment Officer, Teacher Retirement System of Texas "With great lucidity, Alan Dorsey's book, Active Alpha, fills an important void by identifying the relevant institutional features of this complex subject and by providing a unifying analytic framework for understanding and constructing portfolios of alternative assets. For anyone investing in the alternative class, from the new student to the experienced practitioner, Active Alpha is a necessary read. I am recommending it to everyone I know with such an interest, and it is destined to become a much thumbed reference on my shelf." -Steve Ross, Franco Modigliani Professor of Financial Economics, Sloan School, MIT

Author Biography

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.

Table of Contents

Preface	p. xi
Acknowledgments	p. xv
About the Author	p. xvi
Alternative Investments and Investors
Introduction	p. 3
Integration of Alternative Investments and Traditional Asset Classes through Factor Analysis	p. 3
Approaches to Portfolio Construction	p. 4
The Identification of Alpha and Beta in New Investment Strategies	p. 5
What the Future Holds	p. 8
Summary	p. 8
Investors in Alternative Investments and the Necessary Ingredients for a Successful Program	p. 11
Types of Investors and Their Approaches to Alternative Investments	p. 12
The Necessary Ingredients for a Successful Alternative Investment Program	p. 18
Support from Investment Management Firms and Consultants	p. 33
Investors Deciding to Minimize the Use of Alternative Investments	p. 36
Summary	p. 42
Hedge Funds	p. 43
Performance and Diversification Attributes	p. 43
Market Segmentation	p. 47
Hedge Fund Strategies	p. 47
The Construction of a Segregated Portfolio of Hedge Funds	p. 69
Summary	p. 74
Private Equity	p. 77
Performance and Diversification Attributes	p. 77
Dispersion of Returns	p. 83
Private Equity Strategies	p. 85
The Construction of a Segregated Portfolio of Private Equity	p. 95
Summary	p. 97
Real Estate	p. 99
What Is the Attraction?	p. 99
Real Estate Strategies	p. 104
The Construction of a Segregated Portfolio of Real Estate	p. 114
Summary	p. 123
Currency, Commodities, Timber, and Oil and Gas	p. 125
The Qualitative Determinants of Returns	p. 125
The Attraction of Currency	p. 127
The Attraction of Commodities	p. 130
Currency and Commodity Strategies	p. 132
The Attraction of Timber	p. 136
Timber Strategies	p. 139
The Attraction of Oil and Gas	p. 140
Oil and Gas Strategies	p. 142
The Construction of a Segregated Portfolio of Currencies, Commodities, Timber, and Oil and Gas	p. 144
Summary	p. 147
Alternative Investments in Traditional Portfolios
The Migration of Hedge Funds into the Private Equity Realm	p. 151
Are Hedge Funds Gaining Market Share from Private Equity?	p. 152
How Well Suited Are Hedge Funds to Private Equity Investments?	p. 157
The Power of Compounding: A Comparative Advantage for Private Equity	p. 159
The Fee Differential between Hedge Funds and Private Equity	p. 160
Alternative Investment Fee and Term Components	p. 164
Summary	p. 176
Cash Flow Forecasting and Its Implications for Rebalancing	p. 177
Alternative Investment Cash Flow	p. 177
Asset Allocation: Achieving Policy Targets and Rebalancing	p. 195
Cash Flow Forecasting Tools	p. 199
Portfolio Rebalancing Tools	p. 202
Summary	p. 205
Leverage and Portable Alpha	p. 207
Leverage	p. 208
Portable Alpha	p. 213
What Is Portable Alpha?	p. 213
The Benefits and Issues with Portable Alpha	p. 218
Reevaluating the Premise for Portable Alpha	p. 219
The Use of Hedge Funds in Portable Alpha	p. 221
Alternative Thinking about Alpha	p. 227
Summary	p. 231
Factor Analysis: The Rationale	p. 233
Marketplace Changes that Warrant Factor Analysis	p. 234
The Asset-Class Concept	p. 236
Alternative Investments and Factor Analysis	p. 241
Problems with Selecting Vehicles for Alternative Investment Portfolio Construction	p. 243
Quantitative Building Blocks	p. 244
Risk Budgeting Using Factors	p. 249
Beyond Traditional Asset-Class Risk Budgeting	p. 250
Qualitative Independent Variables	p. 253
Illiquidity Factor	p. 255
Summary	p. 271
Factor Analysis: The Findings and Discovering Active Alpha	p. 273
Time Series Delineation and Issues	p. 273
Mean-Variance Optimization	p. 277
Problems Using Mean-Variance Optimization with Alternative Investments	p. 294
Regression Analysis with Alternative Investment Factors	p. 294
Regression Analysis Results and Observations	p. 296
Problems with Conducting Regression Analysis on Alternative Investments	p. 302
Factor Optimization	p. 304
Active Alpha versus Passive Alpha	p. 309
Problems with Factor Optimization	p. 311
Synthetic Portfolios of Alternative Investments	p. 312
Factor Measurement and Risk Monitoring	p. 313
Summary	p. 314
Regression Methodology	p. 316
Notes	p. 347
Glossary	p. 351
References	p. 363
Index	p. 369
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