Alternative Asset Classes Defined?

Yesterday I asked what would you include in alternative assets? What would you like to see that does not already exist in the way of accessible alternative assets?

A few people offered some thoughts and there was some half-kidding about baseball cards including a great one-liner about mothers throwing the cards away which sort of happened to me. You'll notice this card is an error but the corrected card with him on the Rangers was the rarer card, go figure.

I think getting too hung up on definitions is the wrong approach. I would say to focus more on the result a particular thing delivers and how it gets the result. It is this line of thinking that may have prompted a couple of folks to say I may be too vague about this.

First I would say things like wine and art and even my 1971 Roberto Clemente card (I have a collection of like 20 baseball cards) are not really investments easily accessed by a lot of people. I am not saying you can't make money in these things, and I think there is an Art Fund of some sort that exists in Europe but to the extent these are investments is beyond the scope of this site.

A couple of weeks ago I wrote about Dexion Absolute for TSCM which is a publicly traded fund of hedge funds that is listed in the UK under ticker DAB.L but is available in the US with ticker DAXLF.

If you look at a two year chart (hopefully that link works properly) compared to the S&P 500 there is plenty of zig versus SPX' zag. Maybe there is enough for you or maybe not but there is clearly some zig. If you find some sort of long/short product, regardless of what it trades, that consistently delivers an non-correlative result it would likely fit my definition of alternative assets.

The few that I use, so stressing moderation, generally deliver an non-correlative result. Obviously you can drill (or bog?) down in more detail but at some point it becomes counter productive (subjective opinion).

If you think about all the types of products that you know of in this realm like commodity, currency, strategic, toll roads (do these count?) and I'll include hydro funds (I do not own any of these), I can tell you there are plenty more out there that you have never heard of (I seem to find a new one every few days). The chance to find and learn about these is vast. No one will likely be an expert in all of these things. Even if you can come up with a dozen different categories of what you term at alternative it is doubtful you need more than two or three in your portfolio and even that may be too many.

If you are going to swim in this pool I would suggest being cognizant of the issue of hedging an equity portfolio with a few alternative ideas versus hedging a portfolio of alternative strategies with a few equities.

I'll finish with alternative ideas I'd like to see or see more of. For a while XShares had been on file for the AirShares EU Carbon Allowances Fund. I don't know whether this fund will ever come but something that accessed the carbon credit market is bound to come, the growth in this market would seem to be substantial and I think the correlation to US equities would be very low.

The concept behind the Macquarie Pastoral Fund is very interesting to me (livestock and farmland down under). This particular product is not exchange traded so I am going to pass but I believe if it is successful (it is a little over one year old I believe) there will be similar products that do list on an exchange somewhere.

I like the idea of products tied to economic indicators but the correlation to stocks of this sort of thing is probably high but some sort of product tied to GDP growth of a basket of emerging markets or frontier markets would be very interesting.

From the first few posts on this site in 2004 I talked about the extent to which investment products will evolve to offer the chance for much more sophistication to do-it-yourselfers (this has always been obvious) and I think the pace of this will accelerate. Just because there might be several hundred alternative (assume vague definition) products doesn't mean you need more than two in an attempt to reduce your correlation a little.