Active Alpha: A Portfolio Approach to Selecting and Managing Alternative Investments(356 Wiley Finance)

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

Table of Contents:
Preface xi Acknowledgments xv About the Author xvi PART ONE Alternative Investments and Investors CHAPTER 1 Introduction 3 Integration of Alternative Investments and Traditional Asset Classes through Factor Analysis 3 Approaches to Portfolio Construction 4 The Identification of Alpha and Beta in New Investment Strategies 5 What the Future Holds 8 Summary 8 CHAPTER 2 Investors in Alternative Investments and the Necessary Ingredients for a Successful Program 11 Types of Investors and Their Approaches to Alternative Investments 12 The Necessary Ingredients for a Successful Alternative Investment Program 18 Support from Investment Management Firms and Consultants 33 Investors Deciding to Minimize the Use of Alternative Investments 36 Summary 42 CHAPTER 3 Hedge Funds 43 Performance and Diversification Attributes 43 Market Segmentation 47 Hedge Fund Strategies 47 The Construction of a Segregated Portfolio of Hedge Funds 69 Summary 74 CHAPTER 4 Private Equity 77 Performance and Diversification Attributes 77 Dispersion of Returns 83 Private Equity Strategies 85 The Construction of a Segregated Portfolio of Private Equity 95 Summary 97 CHAPTER 5 Real Estate 99 What Is the Attraction? 99 Real Estate Strategies 104 The Construction of a Segregated Portfolio of Real Estate 114 Summary 123 CHAPTER 6 Currency, Commodities, Timber, and Oil and Gas 125 The Qualitative Determinants of Returns 125 The Attraction of Currency 127 The Attraction of Commodities 130 Currency and Commodity Strategies 132 The Attraction of Timber 136 Timber Strategies 139 The Attraction of Oil and Gas 140 Oil and Gas Strategies 142 The Construction of a Segregated Portfolio of Currencies, Commodities, Timber, and Oil and Gas 144 Summary 147 PART TWO Alternative Investments in Traditional Portfolios CHAPTER 7 The Migration of Hedge Funds into the Private Equity Realm 151 Are Hedge Funds Gaining Market Share from Private Equity? 152 How Well Suited Are Hedge Funds to Private Equity Investments? 157 The Power of Compounding: A Comparative Advantage for Private Equity 159 The Fee Differential between Hedge Funds and Private Equity 160 Alternative Investment Fee and Term Components 164 Summary 176 CHAPTER 8 Cash Flow Forecasting and Its Implications for Rebalancing 177 Alternative Investment Cash Flow 177 Asset Allocation: Achieving Policy Targets and Rebalancing 195 Cash Flow Forecasting Tools 199 Portfolio Rebalancing Tools 202 Summary 205 CHAPTER 9 Leverage and Portable Alpha 207 Leverage 208 Portable Alpha 213 What Is Portable Alpha? 213 The Benefits and Issues with Portable Alpha 218 Reevaluating the Premise for Portable Alpha 219 The Use of Hedge Funds in Portable Alpha 221 Alternative Thinking about Alpha 227 Summary 231 CHAPTER 10 Factor Analysis: The Rationale 233 Marketplace Changes that Warrant Factor Analysis 234 The Asset-Class Concept 236 Alternative Investments and Factor Analysis 241 Problems with Selecting Vehicles for Alternative Investment Portfolio Construction 243 Quantitative Building Blocks 244 Risk Budgeting Using Factors 249 Beyond Traditional Asset-Class Risk Budgeting 250 Qualitative Independent Variables 253 Illiquidity Factor 255 Summary 271 CHAPTER 11 Factor Analysis: The Findings and Discovering Active Alpha 273 Time Series Delineation and Issues 273 Mean-Variance Optimization 277 Problems Using Mean-Variance Optimization with Alternative Investments 294 Regression Analysis with Alternative Investment Factors 294 Regression Analysis Results and Observations 296 Problems with Conducting Regression Analysis on Alternative Investments 302 Factor Optimization 304 Active Alpha versus Passive Alpha 309 Problems with Factor Optimization 311 Synthetic Portfolios of Alternative Investments 312 Factor Measurement and Risk Monitoring 313 Summary 314 Appendix: Regression Methodology 316 Notes 347 Glossary 351 References 363 Index 369

About the Author :
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.