Book Review > The Little Book of Alternative Investments, Reaping Rewards by Daring to be Different

“The Little Book of Alternative Investments, Reaping Rewards by Daring to be Different” by Ben Stein & Phil DeMuth, is for those seeking exposure to something unusual. Be honest here, did you hold a reasonable or ideal mix of uncorrelated assets during the GFC?

Before delving into the breadth of alternatives considered by our New York Times bestselling authors, it is worth noting the writing style is light and humorous at times. I really believed I was getting insights from people who are veterans of investment markets, due to their balanced viewpoints. I must say I was somewhat bewildered by the downright bagging of some hedge fund offerings eg “...we’re not against everything. Just private equity, buy/write funds, structured products, 130/30 funds and precious metals.” In addition to the alternatives, a reader will be advised to include some exposure to a range of index funds (ETFs not excluded here) that are proven to  provide better long term return, for more than 85% of investors,  on both time and $ fronts, than the eternal search of elusive stocks that will shoot the lights out.

The top ten key hedge fund strategies are explained in depth, however for the individual investor who does not have greater than $500k to allocate to each strategy and has less than 100 hours to research and evaluate each manager, the acts of “... shorting providing liquidity taking on illiquid investments and generally doing an insane amount of research on recondite topics that funds can exploit to make small amounts of money and then leverage to make very satisfactory amounts of money...” are best accessed via managed funds. One limiting factor, for “down under” investors is little interest in direct access to the USA based funds that provide the cost effective exposure to better alternatives. If these limitations do not apply, at Chapter 12 a detailed assessment of providers, fee structures and “tickers” is offered.  Eg p192, the “Robeco Long/Short Equity (ticker BPLEX) fund managed to do about 20 percentage points better than the S&P500 annually over the past three years at roughly the same level of risk”.

Here’s the obligatory reference to the Sage of Omaha: (discussing historical REIT performance at p90): “Just because an investment doesn’t perform perfectly doesn’t mean we should avoid it. Berkshire Hathaway stock – one of the greatest investments of all time – has, on three occasions, lost half its value.” 

The key take-away message: investing a portion of your funds into assets that are not as correlated to each other and equity investments held directly and through professional managers, over the long-run, although they won’t save you from the next crisis, will provide a small improvement in risk adjusted returns and therefore will make an important difference.  After all isn’t that the goal many of us are searching for?