The Trouble With Alternatives: Leverage and Value

Malcolm Hamilton on why he's worried about alternatives.

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Malcolm Hamilton_betterAlternative investments have raised concerns for Mercer principal and Canadian Investment Review board member, Malcolm Hamilton, particularly when it comes to valuing hard assets like real estate and the use of leverage. He shared his views at the 2012 Investment Innovations Conference which was held in November in San Diego.

Speaking on a panel of experts, Hamilton pointed out the disparity in performance between publicly-traded REITs and the real estate holdings of pension funds during the 2008 Financial Crisis. As publicly-traded real estate values plunged, pension holdings held relatively steady he notes. “If real estate is risky in REITs, it’s risky when held privately,” he said. For Hamilton, this raises some important questions about the use of appraised values to smooth out pension returns over time.

During the discussion, Hamilton also talked about the growing use of leverage in alternatives like real estate, infrastructure and private equity. He believes actuaries still don’t know enough about what role leverage plays in alternatives and this is also a key concern.

Watch our video interview by clicking on the image.

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