There has been a major boom in alternative investments over the last 20 years. Many institutional investors have included alternative asset classes like hedge funds, private equity, and commodities as a bigger proportion in their portfolios compared to traditional allocations in stocks, bonds, and cash as they seek new sources of returns.
Although investors have accepted alternative investments as part of their portfolio, they have for most part included these investments in a haphazard manner. Analysis about portfolio impact, returns, and position sizing have been largely done at the time of opening a position in an investment, but implementation have largely depended on ad-hoc criteria for managing portfolio positions on an ongoing basis.
Active Alpha by Alan H Dorsey gives a comprehensive guide to investing in alternative asset classes by institutional and high net-worth investors.
The book starts with a clear explanation of the organizational and implementation issues that institutional investors face while developing a process for investing in alternative assets. Alan Dorsey explains in depth the requirements in capabilities, staffing requirements, governance issues, due diligence, and access to funds. The author goes in details about the governance issues encountered.
Fundamental drivers of several categories of alternative assets and market conditions that drive the returns of hedge funds, private equity, real estate, currencies, and commodities are explained next. Within hedge funds, there are detailed qualitiative explanations for the mechanics of each of the strategies, their risk/return attributes, and return drivers.
There are several special topics which the book covers which are linked with alternative asset classes including portable alpha, implications of the interest of hedge funds in private equity like investments, and the role of leverage. Practical issues for alternative investment management like cash flow forecasting, its implications for re-balancing such as the ability to maintain portfolio allocations, and tools for managing liquidity and cash flow forecasting are discussed.
A key practical tool that the author highlights in the book is the use of factor analysis for analyzing assets and portfolio construction. The section builds on the qualitative explanation of various alternative asset class drivers with quantitative factors and their use in factor models. As an objective alternative for making ad-hoc portfolio allocations, the book shows how factor analysis can be used for portfolio re-balancing apart from being used as a tool for generating alphas and for risk monitoring.
Active Alpha is a comprehensive and useful book for the management of an alternative asset portfolio by an institutional investor. This book not only covers the basic concepts, but also gives insight into each asset class, and practical tools in creating and managing such a portfolio on an ongoing basis.
The above review was contributed by: Manoj Rengarajan: Manoj holds a Master of Financial Engineering - University of California, Berkeley and he works in the investment management industry and specializes in providing economic and investment outlook andstrategy for global equityand government bond markets. He has an educational background in financialengineering, business, and engineering, and professional interests include business, finance, economics, technology and related areas. To read Manoj's reviews CLICK HERE
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