In recent weeks, several events (the tragedy in New Orleansas well as recent concerns over the collapse of a noted hedgefund) have shown the relevance of the topics raised in this issueof the Journal. Commodities and commodity prices have

received front-page attention from both investors and consumersalike. Individuals are increasingly aware that alternative investmentsinclude not only modern alternatives such as hedge funds but alsotraditional alternatives such as commodities.

The first section of this issue features articles on commodityinvestments. In the first article, “Commodities: A Case for ActiveManagement,” Rian Akey highlights recent arguments for favor-able macro conditions for commodities investments, includingcyclical properties, inflation hedging characteristics, and globaldemand and consumption matters. He documents a variety of thelimitations inherent in passive commodities investments when long-only total return indexes are used and tests the hypothesis that thecommodities asset class has a number of distinct characteristics thatmakes it particularly suitable for skillful active managers to find alphaopportunities. His results show that active management in com-modities can indeed provide superior performance to investors. Inthe second article, “Energy Commodity Prices: Is Mean ReversionDead?” Helyette Geman explores new sources of natural gas as wellas whether natural gas and oil prices exhibit mean reversion. Sheconcludes that with prices of oil approaching $70 per barrel at theend of August 2005 and oil futures trading above $70 on theNYMEX, these alternative sources of natural gas appear today tobe a partial answer to the world energy needs.

While the seeming collapse of the Bayou fund is certainly afinancial tragedy to its investors, the event reminds us that diversi-fication lies at the core of any investor’s return and risk strategy. Thesecond section features articles on asset allocation. In the third arti-cle, “Rank Alpha Funds of Hedge Funds,” Carol Alexander and AncaDimitriu examine the performance of hedge fund portfolios whenfund selection is based on the rank of a fund’s alpha, rather than theestimated value of the alpha. They note that estimated alphas canvary significantly depending on the model used and hence inducea high degree of model risk in portfolio optimization. They find thateven for the simplest factor models, ranking funds according to their

VOLUME 8, NUMBER 2 FALL 2005

THOMAS SCHNEEWEIS EditorHOSSEIN KAZEMI Associate Editor

NOEL AMENC Associate EditorBHASWAR GUPTA Assistant Editor

HARRY KATZ Production and Technology Director

MICHELLE WRIGHT Senior Production ManagerDAVID GOMBAC Senior Staff Copyeditor

AJANI MALIK Reprints Manager

GWENDOLYN TOMASULO Marketing DirectorIAN AU Senior Marketing Manager

DAVID BLIDE Business Development ManagerMEGAN GONYEA Advertising Assistant

ROBERT TONCHUK Director/Central Operations & Fulfillment

KELVIN LOUIE Senior Fulfillment ManagerCHERLY-NINA BONNY Fulfillment Manager

CHRIS BOWERS Business Development ManagerElectronic Publishing

DAVID E. ANTIN Chief Operating OfficerKAREN KNOW Business Manager

ALLISON ADAMS PublisherCHRIS BROWN CEO

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2 THE JOURNAL OF ALTERNATIVE INVESTMENTS FALL 2005

alpha estimates is an efficient selection process. Inthe fourth article, “Suggested Versus Actual Institu-tional Allocations to Real Estate in Europe: A Mat-ter of Size?” Martin Hoesli and Jon Lekander arguethat the increased allocation to real estate by institu-tional investors is made possible mainly by the devel-opment of new investment vehicles, in particularprivate real estate funds, the growing integration ofeconomic regions, and other factors such as the devel-opment of investment benchmarks. They note, how-ever, that the flows needed for the actual allocationby European institutional investors to match the sug-gested allocation requires that at least 31% of the realestate equity universe be held by owner occupiers.

In the section on trade implementation, wefeature an article on the transformation of quantita-tive research into trading strategies. In the article,“Implementable Quantitative Research,” FrankFabozzi, Sergio Focardi, and Christopher Ma explainthe process of performing quantitative research andconverting that research into implementable tradingstrategies. In doing so they seek to reconcile the bestof both worlds and identify concerns in the processof investment research and management.

The final section of this issue features articleson risk management. In “Forward Prices andFutures Prices: A Note on a Convexity Drift Adjust-ment,” Emanuele Amerio provides an overview onthe literature (mainly theoretical) about forwardprices and futures prices on the same underlyingsecurity with the same expiration. The well-knownfundamental relationship between the two prices isderived. In particular, forward prices are expressedin terms of futures prices by means of a convexitydrift adjustment that takes into account the instan-taneous correlation between those futures pricesand discount bonds, driven by two imperfectly cor-related Brownian motions. The derivation of thedrift adjustment is original. In the last article, “AGeneral Revised Historical Simulation Method forPortfolio Value-at-Risk,” Chu Lin, Chang Chien,

and Sunwu Chen estimate portfolio value-at-risk(VaR) using a generalized error distribution (GED)in conjunction with historical simulation. Using12 years of daily return data on five internationalstock indices (S&P 500, FTSE 100, DAX, TAIEX,and Hang Seng) and a hypothetical portfolio formedby these five indices, the authors test the perfor-mance of this modified approach based on the anal-ysis of its estimation conservativeness, accuracy, andefficiency. They find that incorporating the GEDmodel into historical simulation method results ina substantial improvement in capturing recent mar-ket volatility, and hence in the accuracy and effi-ciency of portfolio VaR. However, they also find thatthe regulated trading price limit may influence theperformance of estimation accuracy to some extent.In addition, their empirical results show that thespecified GED models with tail-thickness parame-ter perform much better than those specified asnormal distributions. These results provide evi-dence that fat-tailed GED models are more suitablewhen returns are not normally distributed.

Readers will note that this issue is a little heav-ier than most. Readers, I am sure, agree that the alter-native investments arena is continuing to grow andexpand into a wider range of investment classes. Inresponse, the Journal will likewise continue to growand expand (this issue a little more than most). In part,how we grow is dependent on your support, yourinterest, and your involvement. As evidence of thisinvolvement, we especially thank the New YorkMercantile Exchange for their sponsorship of this issueand their continued support for research in the areaof alternative investments. We look forward to work-ing with all members of the alternative investmentcommunity in continuing to make the Journal theprimary source of quality research in the area ofalternative investments.

Thomas SchneeweisEditor

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