"Why would anyone invest in the stock market?"
Hamilton "Tony" James looked up from his notes and peered out at the audience over the rims of his glasses. The investors seated in the chandelier-adorned meeting room of New York's Waldorf-Astoria hotel had been in their chairs for hours. Yet, James paused to let his point sink in. Someone laughed. James, president since 2005 of Blackstone Group LP, was stone-faced.
The occasion was Blackstone's third annual investor day, Bloomberg Markets magazine reports in its August issue. The firm is the world's largest manager of so-called alternative investments, with $218 billion under management. It runs private-equity funds and hedge funds, invests heavily in credit securities and owns vast expanses of real estate. One of its properties is the Waldorf itself.
Alternatives such as those managed by Blackstone have gained in popularity during the past 20 years as investors searched for alpha - returns uncorrelated with and higher than those offered by the broad stock and bond markets.
Celebrity investing
The people who run companies specialising in alternatives, including billionaires such as Steve Cohen, Henry Kravis, John Paulson and Blackstone co-founder Steve Schwarzman - have become celebrities. Assets overseen by hedge funds alone increased to $1.87 trillion this year from $118 billion in 1997 - much of it from pension funds, endowments, family offices and sovereign-wealth funds.
Virtually every alternative category crashed in the financial meltdown of 2007 to 2009 - none more severely than property, with housing and commercial real estate prices falling as much as 40 per cent.
Yet, as markets have recovered, it's real estate that has led the way. The sector dominates Bloomberg Markets' ranking of alternatives, which shows that real estate investment trusts - which pool investor money to buy property and are sold like stocks - have gained more than any other alternative category in the past three years. Large-capitalisation REITs returned 17.3 per cent annualized in the three years from March 31, 2010, to March 28, 2013, besting private equity, which returned 15.2 per cent.
Index search
To find the best-performing unconventional investments, Bloomberg searched its own indexes covering hedge funds, funds of funds, commodities and REITs. Bloomberg's Rankings team also drew on outside indexes in search for the best-performing private-equity funds and collectibles, such as vintage cars, stamps, contemporary art and wine.
The best bets ranged from corn and silver futures, which returned 33.8 per cent and 20.5 per cent annualised over three years, to a Chateau Pavie Bordeaux and a 1957 Ferrari 250 Testarossa, which recently sold for $16.4 million.
Among the worst-performing alternatives were hedge funds, which returned 3.3 per cent, and funds of hedge funds, which lost money overall. Most alternatives struggled to beat the Standard & Poor's 500 Index (SPX), which returned 12.7 per cent annualised over the three years ended on March 28 and was up more than 15 per cent this year as of July 10.
James says that investing in alternatives makes sense even when they underperform.
No correlation
"If you can put a bunch of money into these idiosyncratic investments, then you get a lot of diversification benefit because the returns are very uncorrelated" to the broader markets, he says, speaking from his office 44 floors above Park Avenue in Manhattan. "So even though you are putting a riskier asset in your portfolio, because it's not correlated with everything else that you own, the portfolio volatility actually comes down."
For investors in real estate and REITs, valuations fell further and faster than other assets and have in the past three years jumped higher than the S&P 500.
"If you wind the clock back to 2009, real estate had just been through a tremendous crash that helped bring down the global economy," says Bob Rice, managing partner at New York-based merchant bank Tangent Capital Partners LLC and author of "The Alternative Answer" (HarperBusiness, 2013). "Things that are way down are going to come back. On top of that, central banks have given people a prevalence of cheap money to borrow and get back into alternatives such as real estate."
The return of consumer confidence has helped drive up REIT share prices by sending shoppers back to the stores. REITs that invest in shopping malls boasted the best performance for the three years ended on March 28, with an annualized return of 25.3 per cent, according to data compiled by Bloomberg. Leading the list of best-performing mall investors was Michael Glimcher, whose Columbus, Ohio-based Glimcher Realty Trust gained 38 per cent.
Hamilton "Tony" James looked up from his notes and peered out at the audience over the rims of his glasses. The investors seated in the chandelier-adorned meeting room of New York's Waldorf-Astoria hotel had been in their chairs for hours. Yet, James paused to let his point sink in. Someone laughed. James, president since 2005 of Blackstone Group LP, was stone-faced.
The occasion was Blackstone's third annual investor day, Bloomberg Markets magazine reports in its August issue. The firm is the world's largest manager of so-called alternative investments, with $218 billion under management. It runs private-equity funds and hedge funds, invests heavily in credit securities and owns vast expanses of real estate. One of its properties is the Waldorf itself.
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When James finally answered his own question about stocks, he told the audience they were a fool's game compared with Blackstone's investment funds, which have returned at least 15 per cent annualised during the past 26 years, according to the firm. A good investment lately is Blackstone. The firm's shares returned 89.4 per cent during the 12 months ended on June 10, while still trading below their initial offering price in 2007.
Alternatives such as those managed by Blackstone have gained in popularity during the past 20 years as investors searched for alpha - returns uncorrelated with and higher than those offered by the broad stock and bond markets.
Celebrity investing
The people who run companies specialising in alternatives, including billionaires such as Steve Cohen, Henry Kravis, John Paulson and Blackstone co-founder Steve Schwarzman - have become celebrities. Assets overseen by hedge funds alone increased to $1.87 trillion this year from $118 billion in 1997 - much of it from pension funds, endowments, family offices and sovereign-wealth funds.
Virtually every alternative category crashed in the financial meltdown of 2007 to 2009 - none more severely than property, with housing and commercial real estate prices falling as much as 40 per cent.
Yet, as markets have recovered, it's real estate that has led the way. The sector dominates Bloomberg Markets' ranking of alternatives, which shows that real estate investment trusts - which pool investor money to buy property and are sold like stocks - have gained more than any other alternative category in the past three years. Large-capitalisation REITs returned 17.3 per cent annualized in the three years from March 31, 2010, to March 28, 2013, besting private equity, which returned 15.2 per cent.
Index search
To find the best-performing unconventional investments, Bloomberg searched its own indexes covering hedge funds, funds of funds, commodities and REITs. Bloomberg's Rankings team also drew on outside indexes in search for the best-performing private-equity funds and collectibles, such as vintage cars, stamps, contemporary art and wine.
The best bets ranged from corn and silver futures, which returned 33.8 per cent and 20.5 per cent annualised over three years, to a Chateau Pavie Bordeaux and a 1957 Ferrari 250 Testarossa, which recently sold for $16.4 million.
Among the worst-performing alternatives were hedge funds, which returned 3.3 per cent, and funds of hedge funds, which lost money overall. Most alternatives struggled to beat the Standard & Poor's 500 Index (SPX), which returned 12.7 per cent annualised over the three years ended on March 28 and was up more than 15 per cent this year as of July 10.
James says that investing in alternatives makes sense even when they underperform.
No correlation
"If you can put a bunch of money into these idiosyncratic investments, then you get a lot of diversification benefit because the returns are very uncorrelated" to the broader markets, he says, speaking from his office 44 floors above Park Avenue in Manhattan. "So even though you are putting a riskier asset in your portfolio, because it's not correlated with everything else that you own, the portfolio volatility actually comes down."
For investors in real estate and REITs, valuations fell further and faster than other assets and have in the past three years jumped higher than the S&P 500.
"If you wind the clock back to 2009, real estate had just been through a tremendous crash that helped bring down the global economy," says Bob Rice, managing partner at New York-based merchant bank Tangent Capital Partners LLC and author of "The Alternative Answer" (HarperBusiness, 2013). "Things that are way down are going to come back. On top of that, central banks have given people a prevalence of cheap money to borrow and get back into alternatives such as real estate."
The return of consumer confidence has helped drive up REIT share prices by sending shoppers back to the stores. REITs that invest in shopping malls boasted the best performance for the three years ended on March 28, with an annualized return of 25.3 per cent, according to data compiled by Bloomberg. Leading the list of best-performing mall investors was Michael Glimcher, whose Columbus, Ohio-based Glimcher Realty Trust gained 38 per cent.