hiriskpaul wrote:It is a reasonable working assumption that asset classes, derivatives, factors, hedge fund strategies, etc. all have similar risk adjusted returns at any point in time. If that is not the case then money tends to flow towards whatever is likely to deliver the better risk adjusted return, which evens things up. I am talking about established rational stuff here, not speculative scammy crypto-babble type nonsense.
Occasionally things get missed and it can take some time for corrections to take place and money can be made when that happens, but over an extended period the returns achieved, adjusted for risk, roughly evens out. This does not necessarily apply at the individual security level where unsystematic risk comes into play, but at the level of broad categories where that unsystematic gets diversified away, so global equities (but not individual shares), fine art (but not individual pieces), property (but not individual properties) should produce similar risk adjusted returns. As discussed by SalvorHardin, the problem for retail investors is most of these alternative investments are hard to access at low prices. Property is possible through BTL, but not without the high unsystematic risk of owning just a few similar types of property and having to do a lot of the managing yourself. You could load up on REITs as an alternative to diversify away the unsystematic risk but then there is a whole layer of cost between you and the return on the assets. Compared with some alternative investments though, the costs associated with REITs is trivial. It is an absolute classic that HF strategies typically reward those running the HF to a far greater extent than they do HF investors.
On the reasonable working assumption that all types of investments should have approximately the same risk adjusted returns, why not simply target the sources of risk and return available at low cost? Global equities are probably the best place to start as they can be accessed for peanuts, then use retail cash deposits to adjust for the desired level of risk. Job done. Not what I do, but I do occasionally ask myself why not? Especially on days when the price of oil has dramatically moved against me
The same reasoning can be applied to asset classes as well as individual shares. Buying fine art you get exposure to compensated risks (eg poor growth in China) and uncompensated risk (eg a major fraud being uncovered at Christie's). My assumption would be a large fine art holding increases risk without increasing expected return.
If asset classes aren't perfectly correlated (which they aren't), you should hold all of them in some proportion for the most effcient portfolio. You miss out on some diversification benefit being 100% equities.
The two diversifiers that most interest me are bonds and property because they large asset classes that I assume are underrepresented on the balance sheets of listed companies. If you were trying to build a portfolio of all the assets in the world weighted by value, you would be missing out important components of global wealth by leaving out property and bonds.
That doesn't apply to niche assets because you get exposure to most things in equity trackers. If you own diageo, you have exposure to the whisky market already. Even if an industry is underrepresented in listed equities, when you think of the diversity in the businesses carried on by the S&P 500, for example, one or two more isn't going to make any difference unless they are very valuable. Other than property and bonds, I can't think of any.
I think "alternatives" are marketing gimmicks that play on the fact people don't view shares as a part of a business. They give the impression that because they are offering direct ownership or a fund, the risk profile is different to listed alternatives but really it isn't. It's an illusion caused by the lack of illiquidity. Fine wine, antiques and forrestry are all cylical markets that are sensitive to macro conditions, that remains the case when those assets are held through an unquoted vehcile.
There's an unlimited amount of "alternatives" you could invent by taking any asset that businesses profit from and offering some direct exposure to it for high fees claiming it has diversification benefits.