Alternative investments aren't typically what one thinks of when one thinks of index investing. For one thing, the space encompasses a wide range of asset classes and strategies, most of which are associated with active management. For another, the very nature of the category defies quantification—indexes typically aim to capture beta and market performance, while the alternative investments space is all about alpha and uncorrelated returns. How do you index that?
As it turns out, our roster of authors for this issue of the Journal of Indexes has some suggestions.
We kick things off with an exploration of managed futures by WisdomTree's Jeremy Schwartz and Chris Jabara. They first consider the development of managed futures strategies and then segue into a discussion of Alpha Financial Technologies' Diversified Trends Indicator and how it captures the performance of a managed futures approach.
Next up, Pimco's Vineer Bhansali offers a meditation on what is necessary to construct an index to hedge tail risk. He's followed by a provocative discussion with Mark Yusko of Morgan Creek Capital, who's not afraid to offer up opinions that might not resonate with die-hard passive investors.
Peter Little and Greg King of Credit Suisse discuss the difficulties of capturing long/short strategies in an index, and provide explanations of two successful methods: factor based and mechanical based. They are followed by Boston Advisors' Michael Vogelzang, who offers a quick look at the existing pool of alternative ETFs and offers suggestions to issuers and end-users as to what is necessary for those products to thrive.
Kishore Karunakaran of QuantShares weighs in with an explanation of how factor-based or thematic indexes can round out an asset allocation, choosing to focus on a market-neutral strategy as an example. David Blitzer takes on absolute-return strategies, reminding readers that benchmarks are still necessary to evaluate performance.
IndexIQ's Salvatore Bruno and Robert Whitelaw tackle hedge fund benchmarking and the choices and trade-offs that must be made to construct a representative and investable index. Next, David Krein and John Prestbo of Dow Jones Indexes bring a historical perspective to the alternatives space and note that it wasn't that long ago that stocks were considered the real alternatives.
Finally, our own Heather Bell closes out the issue with a home investing solution you can't afford to do without.
Happy (alternative) Investing,