H. Kent Baker (American University, USA)
Greg Filbeck (Penn State Behrend, USA)
Andrew C. Spieler (Hofstra University, USA)

The Savvy Investor's Guide to Building Wealth through Alternative Investments

ISBN: 978-1-80117-138-0, eISBN: 978-1-80117-135-9

Publication date: 13 July 2021


Baker, H.K., Filbeck, G. and Spieler, A.C. (2021), "Prelims", The Savvy Investor's Guide to Building Wealth through Alternative Investments (The Savvy Investor's Guide), Emerald Publishing Limited, Bingley, pp. i-xvii.



Emerald Publishing Limited

Copyright © 2021 H. Kent Baker, Greg Filbeck, and Andrew C. Spieler

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American University, USA


Penn State Behrend, USA



Hofstra University, USA

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First edition 2021

Copyright © 2021 H. Kent Baker, Greg Filbeck, and Andrew C. Spieler. Published under an exclusive license by Emerald Publishing Limited.

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ISBN: 978-1-80117-138-0 (Print)

ISBN: 978-1-80117-135-9 (Online)

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List of Figures xiii
List of Tables xiii
About the Authors xv
Acknowledgments and Dedication xvii
Introduction 1
1. Hedge Funds: Investing for Shorter-term Opportunities 11
1.1. What Is a Hedge Fund, and How Does It Work? 14
1.2. How Does a Hedge Fund Differ from a Mutual Fund? 14
1.3. What Are the Different Approaches for Owning a Hedge Fund? 17
1.4. Why Are Hedge Funds Vital to the Financial Industry and Society in General? 18
1.5. What Advantages Do Hedge Funds Offer Investors? 19
1.6. What Are the Disadvantages or Drawbacks of Owning Hedge Funds? 20
1.7. What Are the Major Categories and Subcategories of Hedge Funds? 22
1.8. How Are Hedge Funds Regulated? 28
1.9. How Are Hedge Funds Taxed? 30
1.10. What Selection Criteria Should Investors Use to Evaluate Hedge Funds? 30
1.11. What Should an Investor Consider When Performing Due Diligence on Hedge Funds in the Fund Selection Process? 33
1.12. How Is a Hedge Fund’s Performance Measured? 35
1.13. How Have Hedge Funds Performed Since the 1990s? 37
1.14. What Are Hedge Fund Replication Strategies? 38
1.15. What Are ’40 Act Funds, and How Can Investors Use Them to Gain Exposures Similar to Hedge Funds? 40
1.16. How Do Funds of Hedge Funds Differ from Multi-strategy Funds? 41
1.17. Why Is Manager Selection a Critical Consideration in Picking Hedge Funds? 42
1.18. What Traits Are Generally Associated with Successful Hedge Fund Managers? 43
1.19. What Roles Do Hedge Funds Play in the Activist Investing Movement? 45
1.20. What Are the Primary Concerns Investors Should Consider Before Investing in Hedge Funds? 46
1.21. Should You Invest in Hedge Funds? 47
1.22. What Are Some Online Resources for Hedge Funds? 47
Takeaways 48
2. Private Equity: Investing for Longer-term Opportunities 51
2.1. What Is PE, and How Does It Work? 53
2.2. How Does PE Differ from a Hedge Fund? 54
2.3. How Does PE Differ from Public Equity? 54
2.4. Why Is PE Important to the Financial Industry and Society in General? 55
2.5. What Advantages Does PE Offer Investors? 57
2.6. What Disadvantages or Drawbacks Does PE Offer Investors? 57
2.7. How Does VC Work? 59
2.8. What Features Does an LPA Typically Cover? 61
2.9. What Are Co-investments, and How Can They Potentially Help or Hurt Investors? 63
2.10. What Is a Buyout Fund? 65
2.11. What Main Risks Do PE Firms Face? 66
2.12. What Do the Terms Drawdown and Vintage Year Mean? 67
2.13. How Can Investors with Limited Capital Access the PE Market? 67
2.14. How Is the Performance for PE Investments Benchmarked? 68
2.15. What Is the Regulatory Framework for PE? 69
2.16. How Are PE Funds Taxed? 70
2.17. How Prevalent Are PE Funds Among Investors? 70
2.18. Why Do Investors Typically Use IRR to Measure Performance? 71
2.19. What Are the Primary Advantages and Disadvantages of Using IRR to Measure a PE’s Performance? 72
2.20. What Other Measures Can Investors Use to Assess PE Performance? 74
2.21. Why Is Manager Selection a Critical Consideration in PE Investing? 77
2.22. What Factors Are Relevant to Consider in Selecting a PE Manager? 78
2.23. What Are Debt Instruments Related to PE? 79
2.24. What Role Does Mezzanine Debt Play for the Issuing Company? 81
2.25. What Are Some Recent Trends and Innovations in PE Investing? 82
2.26. What Are Some Online Resources for PE? 84
Takeaways 85
3. Investing in Real Estate: It’s Not Just Your Home 87
3.1. What Is Real Estate and Its Major Characteristics? 89
3.2. What Are the Primary Property Types? 90
3.3. What Are the Advantages of Owning Real Estate? 91
3.4. What Are the Challenges and Risks to Real Estate Ownership? 93
3.5. What Ways Are Available to Invest in Real Estate? 95
3.6. What Is a REIT and Its Major Types? 97
3.7. What Are the Different Investment Strategies – Core, Core-plus, Value-add, Opportunistic? 99
3.8. What Are the Critical Features of REITs? 101
3.9. What Approaches Can Investors Use to Value Real Estate Property? 102
3.10. What Are Some Typical Real Estate Indices? 105
3.11. How Does Direct Real Estate Investing Differ from Owning Shares in a REIT? 106
3.12. What Is Real Estate Crowdfunding? 108
3.13. What Methods Are Available for Measuring the Return of a Real Estate Investment? 109
3.14. How Does Real Estate Compare to Other Asset Classes in a Portfolio Allocation Strategy? 113
3.15. What Is a Mortgage, and How Are Mortgage Rates Determined? 114
3.16. What Kind of Lenders Are Available, and How Do They Differ? 115
3.17. What Factors Do Mortgage Lenders Examine? 116
3.18. What Happens in a Foreclosure? 117
3.19. What Tax Advantages and Disadvantages are Specific to Real Estate? 118
3.20. What Common Mistakes Do Investors Make in Real Estate? 119
3.21. What Are Some Online Resources for Real Estate? 121
Takeaways 122
4. Investing in Commodities: Getting an Inflation Hedge 123
4.1. What Are Commodities and Their Primary Attributes? 126
4.2. What Are the Most Common Types of Commodities? 127
4.3. What Are the Advantages of Investing in Commodities? 131
4.4. What Are the Potential Disadvantages of Investing in Commodities? 132
4.5. How Can Investors Trade Commodities? 134
4.6. How Can Retail Investors Get Started in Investing in Commodities? 136
4.7. What Factors Affect the Commodity Markets? 139
4.8. What Ways Are Available to Measure Returns in Commodity Markets? 140
4.9. Who Are the Prominent Participants in the Commodities Markets? 142
4.10. What Are Recent Developments in Commodity Markets? 143
4.11. What Are Common Commodity Indices? 144
4.12. What Strategies Are Available for Investing in Commodities? 145
4.13. What Mistakes Should Retail Investors Avoid When Investing in Commodities? 147
4.14. What Are Some Online Resources for Investing in Commodities? 148
Takeaways 149
5. Investing in Infrastructure: A Road to Economic Growth 151
5.1. What Is Infrastructure? 152
5.2. Why Is Infrastructure Necessary? 153
5.3. Who Owns Infrastructure? 153
5.4. Who Invests in Infrastructure Outside of Governments? 155
5.5. How Can Infrastructure Be Classified? 156
5.6. What Is the Difference Between Brownfield and Greenfield Investments? 159
5.7. What Are the Common Attributes of Infrastructure Investments? 160
5.8. Why Consider Investing in Infrastructure? 162
5.9. What Are the Potential Risks Associated with Investing in Infrastructure? 165
5.10. How Can Investors Gain Exposure to Infrastructure? 168
5.11. What Are Publicly-Traded Vehicles Available for Investing in Infrastructure? 168
5.12. What Are the Pros and Cons of Investing in Infrastructure Stocks? 169
5.13. What Are Some Examples of Infrastructure Stocks? 170
5.14. Why Are Mutual Funds an Attractive Vehicle for Investing in Infrastructure? 172
5.15. What Are Some Examples of Infrastructure Mutual Funds? 173
5.16. How Can Investors Choose Between Different Types of Infrastructure Mutual Funds? 175
5.17. Why Are ETFs a Good Investment Vehicle for Infrastructure? 176
5.18. What Benchmarks Are Available for Publicly Listed Infrastructure Securities? 177
5.19. What Are Some Examples of Infrastructure ETFs? 178
5.20. What Selection Criteria Should Investors Use Before Buying an Infrastructure ETF? 179
5.21. What Is an MLP? 181
5.22. How Is an MLP Structured? 182
5.23. What Ways Are Available for Investing in an MLP? 183
5.24. What Are Some Pros and Cons of Investing in MLPs? 184
5.25. What Are Some Examples of the Largest and Most Popular MLP Stocks? 185
5.26. What Factors Should Investors Consider Before Investing in an MLP? 186
5.27. What Is an Infrastructure PE Fund? 187
5.28. What Types of Municipal Debt Are Available for Investors Interested in Investing in Infrastructure? 188
5.29. What Are the Tradeoffs Between Investing in Public (Listed) Versus Private (Unlisted) Infrastructure, Specifically in an Infrastructure PE Fund? 189
5.30. Where Is a Good Place to Start Investing in Infrastructure for a Typical Individual Investor? 190
5.31. What Types of Individual Investors Are Infrastructure Best Suited? 191
5.32. What Are Some Useful Online Resources for Infrastructure? 192
Takeaways 193
Index 197

List of Figures

Introduction Figure 1. Types of Traditional and Alternative Investments 4
Introduction Figure 2. Pros and Cons of Alternative Investments Relative to Traditional Investments 9
Figure 2.1. J-Curve Effect 66
Figure 3.1. Basic Structure of a Mortgage-Backed Security 98

List of Tables

Table 2.1. Five Stages of Venture Capital 60
Table 3.1. The Real Estate Investment Matrix 96
Table 4.1. Historical Commodity Returns 133

About the Authors

H. Kent Baker, DBA, PhD, CFA, CMA, is a University Professor of Finance in the Kogod School of Business at American University. He is an award-winning author/editor who has published 38 books and more than 300 articles and other publications. He is among the top 1% of the most prolific authors in finance. He serves on numerous editorial boards and is the editor of two investment book series. He is internationally known for his work in investor behavior, financial markets and investments, and survey research. He has consulting and training experience with more than 100 organizations in the United States, Canada, and Europe. He was the President of the Southern Finance Association and has received numerous research, teaching, and service awards, including the Southern Finance Association’s 2019 Distinguished Scholar and American University’s Scholar/Teacher of the Year.

Greg Filbeck, DBA, CFA, FRM, CAIA, CIPM, FDP, PRM, holds the Samuel P. Black III Professor of Finance and Risk Management at Penn State Behrend and serves as Director of the Black School of Business. Before joining the faculty at Penn State Behrend in 2006, he served as Senior Vice President of Kaplan Schweser from 1999 to 2006. He also held academic appointments at Miami University (Ohio) and the University of Toledo, where he also served as the Associate Director of the Center for Family Business. He has authored or edited 14 books and published more than 105 refereed academic journal articles. He served as President of the CFA Society Pittsburgh from 2014 to 2018 and was President of the Southern Finance Association from 2015 to 2016.

Andrew C. Spieler, PhD, CFA, FRM, CAIA, is the Robert F. Dall Distinguished Professor of Business and Professor of Finance in the Frank G. Zarb School of Business at Hofstra University. He is the founder of Advanced Quantitative Consulting. He has published over 60 articles, book chapters, and books on real estate, fixed income, hedge funds, and behavioral finance. He received three “Best Paper” awards from the American Real Estate Society. He was also the recipient of two “Distinguished Teacher of the Year” and two “Researcher of the Year” awards at Hofstra University. He is the co-director for the annual conference sponsored by the Breslin Real Estate Center. The Wall Street Journal, New York Times, MSNBC, ABC News, Fox News, and others often quote him.

Acknowledgments and Dedication

“Writing is easy. All you have to do is cross out the wrong words.”

Mark Twain

In writing The Savvy Investor’s Guide to Building Wealth Through Alternative Investments, we kept Mark Twain’s comment in mind. Hopefully, we crossed out the wrong words and kept the right ones. However, the publication of this book was a team effort. Everyone at Emerald Publishing involved with this book provided exceptional guidance, especially Charlotte Maiorana (Vice President), Hayley Coulson (Content Development Editor), and Lidiya Prince (Copy Editor). We also owe our respective institutions – the Kogod School of Business at American University, the Black School of Business at Penn State Behrend, and the Frank G. Zarb School of Business at Hofstra University – a debt of gratitude. Finally, we thank our families for their support and understanding: Linda and Rory Baker; Mickey, Judy, Janis, Aaron, Andrea, Kyle, and Grant Filbeck; Terry, Harrison, Teresa, Robin, Kate, and Hudson Spieler.