Baker and Filbeck, Alternative Investments

Alternative Investments: Instruments, Performance, Benchmarks, and Strategies, edited by H. Kent Baker and Greg Filbeck (Wiley, 2013), is the latest addition to the Kolb Series in Finance. The books in this series, all hefty (this one is over 600 pages), are collections of papers by both academics and practitioners.

The editors have organized Alternative Investments around the standard offerings: real estate, private equity, commodities and managed futures, and hedge funds. In twenty-eight chapters the book’s contributors take the reader on a journey that touches on a wide range of topics, from the introductory to the arcane. The retail investor or the investing professional relatively new to the game can learn about the role of alternative investments in strategic asset allocation and investing in commodities. For the more academically and statistically oriented reader there is an analysis that uses multivariate cointegration techniques to ascertain whether “investors in REITs receive a return consistent with the direct real estate market.” The quick answer: the two tend toward a long-term equilibrium but financial markets lead movements in the real estate market.

Some of the asset classes described in this book are not readily available to the retail investor. Take mezzanine capital, for instance. “Seasoned investors in alternative assets have come to realize its resilience as an asset class capable of generating stable noncorrelated returns across a wide variety of prevailing market conditions. … However, the bespoke nature of mezzanine instruments combined with their term structure mean that mezzanine capital is an illiquid asset class. For this reason, mezzanine debt is … best invested in by using either a dedicated closed-end blind pool fund or a specialist credit fund.” (p. 279) In brief, probably not for “the rest of us.” But, in case you’re interested, KeyBanc puts out a quarterly mezzanine debt newsletter.

To my mind the strongest part of the book is the one that deals with real estate. It includes seven chapters: “REITs and the Private Real Estate Market,” “Commercial Real Estate,” “Real Estate Investment Trusts,” “Mortgage-Backed Securities,” “Mezzanine Debt and Preferred Equity in Real Estate,” “Real Estate Appraisal and Valuation,” and “Performance of Real Estate Portfolios.” Now that real estate is no longer a dirty word, it is high time (never say “too late”) for serious investors to learn more about the nitty-gritty of investing in real estate. No, not flipping condos, but how the pros do it. It’s a complicated field, but it remains a potentially lucrative alternative investment. Even if you’re simply buying a REIT, you should know more than most investors probably do.

Students and investment professionals would do well to read the whole book. The retail investor can pick and choose. Whatever your method, you will be well rewarded.