Investment benchmarks for alternative asset classes

  • Daniel Broby

Student thesis: Doctoral Thesis

Abstract

This thesis is a collection of essays that explore current theory and practice in respect of benchmarks for alternative asset classes. A benchmark is required in order to measure and attribute the performance of professionally managed investment funds. A principal component analysis (PCA) based index, based on factor weights determined by eigenvalues, is proposed to address identified weaknesses in current indices. The approach uses linear combinations of factor returns to construct alternative asset indices.;These are statistically correlated with the principal components identified. The resultant indices provide an attributable benchmark, particularly for commodity futures. Collectively the essays identify and suggest enhancements to index construction methodology as applied to alternative assets. Increased investment in such assets has created a need for such new and innovative benchmarks. The essays focus on a variety of unique features present in alternative assets and the proxies used to invest in them. It was found that the lack of reporting on leverage and liquidity is the biggest impediment to index refinement in real estate and hedge fund indices.;The gearing and lack of liquidity in the investment proxies make indices harder to replicate. Principal component derived factor weights can partially address this issue. The approach also proves useful to address identified problems in peer group benchmarking. It is concluded that PCA can be used to benchmark commodity futures and help in the classification of hedge fund strategies. The chapters herein have important implications for asset allocation, manager selection, index construction, portfolio risk assessment, alternative asset pricing, the testing of commodity market efficiency and the synthesis of hedge fund strategies. They point to the need for a more bespoke treatment of the benchmarking of investments in alternative assets.
Date of Award30 Apr 2021
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SupervisorKrishna Paudyal (Supervisor) & Andrew Marshall (Supervisor)

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