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The Only Guide to Alternative Investments You'll Ever Need The Good, the Flawed, the Bad, and the Ugly Contents List of Tables Acknowledgments Introduction A Travel Guide to Alternative Investments Modern Portfolio Theory The Good, the Flawed, the Bad, and the Ugly xix xxi xxiii xxiii xxiv xxv PART 1 The Good 1 Real Estate Historical Returns and Risk: U.S. Real Estate, U.S. Equities, and International Equities The Diversification Benefits of REITs Benefits of Diversification: Sample Portfolios Asset Location and Real Estate Recommended Investment Vehicles International Real Estate DRW, RWX, and WPS DFA International Real Estate Securities Portfolio Tax Considerations The Wrap-Up on International REITs Your Home and the Asset Allocation Decision Wrap-Up on the Home as an Investment Wrap-Up on Direct Ownership 21 Summary 21 3 5 6 8 9 9 11 14 14 15 16 16 18 2 Inflation-Protected Securities Real or Nominal Return Bonds: Which Are Riskier? TIPS: Doing the Math Correlations with Equities and Inflation Inflation, Price, and Interest Rate Risk Inflation Risk Price Risk Interest Rate Risk TIPS: Pros and Cons Pros Cons 23 24 25 26 27 27 28 28 28 28 30 Allocating Between Real and Nominal Return Fixed-Income Assets A Shifting Allocation Approach Developing a Strategy Implementation A Shifting Maturity Strategy I Bonds Summary 31 33 35 36 37 38 39 3 Commodities Correlation with Stocks, Bonds, and Inflation Event Risk A Risk-Reduction Tool Portfolio Efficiency Gaining Exposure to Commodities Mutual Funds: QRAAX and PCRIX Commodity-Related ETFs Commodity-Related ETNs CTAs The Argument Against Investing in Commodity Producers The Equities of Oil Producers Implementation Summary 41 43 46 47 48 49 50 53 54 55 57 58 59 60 4 International Equities Emerging Market Equities Correlations Sample Portfolios The Risks of Investing in Emerging Markets Small-Cap and Value Stocks Recommended Vehicles Wrap-Up: Emerging Markets International Small-Cap Stocks Sample Portfolios Recommended Vehicles Summary 63 64 65 66 67 70 72 73 74 75 76 77 5 Fixed Annuities How Long Do Payments Continue? Determinants of Payment Size The Benefits of Annuitization Mortality Credits Make It Possible When Annuities Can Be the Right Choice Evidence from Adademia When to Purchase a Fixed Annuity Inflation-Indexed Immediate Annuities Summary 79 80 81 82 84 85 86 87 88 89 6 Stable-Value Funds Unique Risk and Return Characteristics Investment Portfolios Risks Costs Restrictions Returns Change Slowly Over Time Cash Flows Can Affect Returns Summary 91 92 93 94 95 95 95 96 96 PART 2 The Flawed 7 High-Yield (Junk) Bonds Explaining the Low Correlation Is Higher Yield Worth Higher Risk? The Importance of Equity Risk Hybrid Securities and Asset Allocation Evidence Supported by Theory Do High-Yield Bonds Have a Role? Illiquid Securities Other Negative Characteristics Distribution of Returns Matters High-Yield Bonds and Efficient Frontier Models Inflation Risk Asset Location The Need for Diversification The Historical Evidence Vanguard High-Yield Corporate Fund More Efficient Alternatives Summary 101 102 103 105 105 106 106 107 107 109 111 111 112 113 113 117 118 119 8 Private Equity (Venture Capital) Origins The Attraction The Historical Evidence Characteristics of Private Equity Returns Venture Capital Versus Publicly Traded Securities Inefficient Diversification Bias in the Data Perception Versus Reality Private Equity's Role in a Portfolio Nonmonetary Explanations for Private Equity Investing Summary 123 123 124 125 127 128 128 129 130 130 132 132 9 Covered Calls Taxes Matter Transactions Costs An Alternative Strategy Summary 135 137 137 137 139 10 Socially Responsible Mutual Funds Defining SRI Rapid Growth Does Socially Responsible Investing Come at a Price? The "Price" of Principles Summary 141 141 142 143 145 145 11 Precious Metals Equities Risk Returns Correlations The Hedging Value of PME Positive Attributes of PME Other Considerations Implementing the Strategy Summary 147 147 148 148 148 149 150 152 153 12 Preferred Stocks Long Maturities Risks and Rewards of Long Maturities Call Risk Credit Risk Long Maturities and Call Risk Dividend Suspension Preferential Treatment for Corporate Buyers Other Considerations Tax Advantages Summary 155 156 156 157 158 159 160 160 160 161 161 13 Convertible Bonds The Realities of Convertible Bonds Considerations Shifting Asset Allocation Asset Location Complexity Summary 163 164 164 165 165 166 167 14 Emerging Market Bonds 169 4 Risks Returns Correlations Potential Positives Additional Considerations Summary 169 171 172 174 174 176 PART 3 The Bad 15 Hedge Funds Exclusive Nature Why Hedge Funds Aren't Mutual Funds Facts Versus Fantasies Hedge Fund Risks Wisdom and Experience, or Hope and Hype? The Cost of Folly How High an Alpha Does a Hedge Fund Need? How Funds of Funds Increase Hurdles to Outperformance The "Ill-Logic" of Hedge Funds Long-Term Capital Management The Death of Genius LTCM's Downfall: The Tyranny of Market Efficiency Risk Versus Uncertainty Fooled by Randomness Summary 181 184 185 186 188 193 197 198 200 202 205 205 206 208 210 210 16 Leveraged Buyouts Summary 213 214 17 Variable Annuities Deferred Variable Annuities Tax-Deferred Growth of Earnings The Life Insurance Component Ability to Annuitize Other Negative Features Are VAs Really That Bad? Sold or Bought? The Art of Deception 215 216 216 217 218 218 219 220 220 Variable Immediate Annuities 221 How Payments Are Determined The Purpose of Immediate Annuities Possible Reasons to Buy a Variable Annuity 1035 Exchanges Other Considerations Summary 225 221 222 223 224 224 PART 4 The Ugly 18 Equity-Indexed Annuities Caveat Emptor Minimums That Aren't Minimums Penalties for Early Withdrawal Tax Inefficiency Summary 229 230 232 233 233 234 19 Structured Investment Products Mondo National Bank Principal Protection Notes: Product Features More Efficient Alternatives A Closer Look at Hypothetical FRATS Why Such "Attractive" Terms? More Efficient Alternatives Being Careful Out There Summary 235 236 238 240 241 243 244 245 20 Leveraged Funds The Proof Is in the Pudding Summary 247 248 249 Final Thoughts Notes Glossary Recommended Reading Sources of Data Index 251 253 263 275 277 279