Hossein Kazemi, Ph.D., CFA, is the senior advisor to the Chartered Alternative Investment Analyst Association’s program. In a recent study he co-authored with Kathryn Wilkens, Ph.D., CAIA, titled "A Simple Approach to the Management of Endowments," they present evidence that mid- and small-sized endowments should use ETFs to implement their strategies rather than opting for expensive and illiquid alternative investments. ETF.com discussed Kazemi’s recent work with him as well as his views on the role of ETFs in institutional investing.
ETF.com: Can ETFs accurately capture the performance of alternative investments? Do investors using them for that purpose give up anything they would normally get by investing directly in alternatives?
Kazemi: If you look at any investment—whether it’s publicly traded or private—there are basically sources of returns or risk premiums, and some of those overlap between an alternative and an ETF.
For example, if you’re talking about equity-oriented hedge funds, they have certain risks related to equity markets, and an ETF can give you that. There is the time value of money—both of them, of course, can give you that—but there are some sources of risk and return that might be unique to that private placement or that hedge fund that would not be present in the context of ETFs.
ETFs can capture probably a big portion of them. It depends perhaps on the alternative you’re looking at. But they give up some, and in exchange, they receive something else—mostly liquidity, marketability and transparency, when it comes to ETFs.
It’s a matter of how much investors are giving up—they may not give up much in some cases and they may give up quite a bit in others; it depends. It’s not always the case that they have to give up something, but typically they have to give up something in at least a majority of cases.