Alternative Investments are mean-variance efficient and inflation hedger: fact or fiction?

Abstract

The weight of alternative investments has been increased in the asset mix portfolio of investors due to the increased global financial uncertainty for the last 25 years. Since 90s to post period of global finance crisis, a significant changing trending has been observed in asse mix portfolio.  Farmland and timberland seem to be better choices for an investor to add in her/his portfolio of assets mix as alternative investment due to their diversification characteristics. NCRIEF Farmland and timberland smoothed indices from the 1^st quarter of 1992 to the 3^rd quarter of 2012 and have been used in this study to explore the mean variance diversification features of both alternative asset classes. De-smoothed series has been generated from smoothed series to overcome the autocorrelation problem. Empirical results demonstrate the significant mean variance diversification characteristics of farmland and timberland. Both farmland and timberland have potential to increase the return of a diversified traditional asset portfolio at a given level of risk and vice versa during the period of low market term oil and high uncertainty. During inflationary period, both farmland and timberland possess low inflation hedging characteristics of the study period.