ALTERNATIVE INVESTMENTS: CHEAT SHEET

REAL ASSETS

Real Asset Classification & Characteristics

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Real Estate Valuation: Three Approaches

Income Approach: Value = NOI / Cap Rate

• Cap Rate = NOI / Value (inverse to P/E multiple)

• ↓ Cap Rate = ↑ Valuation (investor accepts lower yield)

• ↑ Cap Rate = ↓ Valuation

Comparable Sales Approach: Adjust recent similar transactions for location, size, quality, condition

Cost Approach: Replacement cost + land value (useful for specialized properties)

REITs vs. Direct Real Estate

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Key: REITs show equity-like correlation in crises despite underlying real estate stability

Infrastructure Assets

Characteristics:

• High upfront capital; long lives (20–100 years)

• Stable, often regulated/contracted cash flows

• Inflation-linked revenues

• Natural monopolies (high barriers to entry)

Examples: Toll roads, airports, ports, utilities, pipelines

Why for Pension Funds? Long-duration, inflation-adjusted cash flows match long-duration liabilities

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COMMODITIES

Total Return Components (Commodity Futures)

Total Return = Spot Return + Roll Yield + Collateral Yield

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Term Structure & Roll Yield

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Key: Backwardation rewards "rolling forward"; contango penalizes it (decay).

Commodity Characteristics vs. Bonds

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Commodity Access Methods

Commodity Futures — Most liquid, leveraged, roll management required

Physical — Mainly precious metals; storage & insurance costs

Equity Linked — Energy/mining producers; adds equity risk

Index Funds — Diversified, but embedded in fund structure

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HIGH-YIELD FORMULAS & DECISION RULES

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EASILY CONFUSED PAIRS

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Feature	Real Assets	Financial Assets
Value Source	Material substance (tangible)	Financial claims
Inflation Hedge	Strong	Weak
Correlation	Low with stocks/bonds	High
Income	Rents, royalties, operations	Dividends, coupons
Liquidity	Low	High
Risks	Illiquidity, transaction costs, property-level	Market, interest rate
Factor	REIT	Direct Real Estate
Liquidity	High (public trade)	Low
Capital Required	Low	High
Management	Professional	Active owner
Correlation (short-term)	High with equities	Low
Distribution	≥90% taxable income	N/A
Valuation basis	Stock market	Appraisal
Component	Definition
Spot Return	Change in commodity spot price
Roll Yield	Gain/loss from rolling near-term to far-term contracts
Collateral Yield	Return on Treasury bills posted as margin
Condition	Definition	Roll Yield	Typical Cause
Backwardation	Near < Far prices	Positive ✓	Supply shortage, high near-term demand
Contango	Near > Far prices	Negative ✗	Ample supply, storage costs
Feature	Commodities	Bonds
Cash Flows	None	Coupons
Price Drivers	Supply/demand, storage	Interest rates, credit
Inflation Hedge	Strong (especially energy, ag)	Weak
Volatility	Very high	Lower
Correlation	Low with stocks/bonds	Negative with stocks
Question	Formula / Rule
Real estate value (income approach)	Value = NOI / Cap Rate
REIT min. distribution	90% × Taxable Income (not NOI)
Inflation hedge ranking	Real assets > commodities > bonds > stocks
Commodity roll yield sign	Backwardation (+) vs. Contango (−)
Property cap rate movement	↑ Cap Rate → ↓ Value (inverse)
Pair	Distinction
NOI vs. Taxable Income (REIT)	NOI = gross; Taxable = NOI – depreciation – interest
Direct Real Estate vs. REIT	Direct = low correlation short-term; REIT = equity-correlated in crises
Backwardation vs. Contango	Backwardation = near > far (positive roll); Contango = near < far (negative roll)
Cap Rate vs. P/E	Cap rate = yield on property; P/E = reciprocal of earnings yield; both inverse to valuation
Infrastructure vs. Real Estate	Infrastructure = utilities/monopolies/regulated; Real estate = direct income property

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QUICK CHECKLIST: ALTERNATIVE INVESTMENTS

• ✓ Real assets = inflation hedge + diversification (low correlation)

• ✓ REIT = ≥90% taxable income distribution (not NOI)

• ✓ Cap Rate inversely related to valuation

• ✓ Infrastructure ideal for pension funds (long duration, inflation-linked)

• ✓ Commodity return = spot + roll + collateral

• ✓ Backwardation = positive roll; Contango = negative roll

• ✓ REITs show equity correlation in short-term stress