Incentive Fees-Impact on Performance Measurement of Hedge Funds

This paper expands on the work of Amenc, Martellini and Ziemann (2009) that studies Inflation-Hedging Properties of Real Assets and Implications for Asset-Liability Management Decisions. Their results suggest that liability hedging investment solutions, including commodities and real estate (Alternative Investments) in addition to inflation-linked securities(TIPS), can be designed to decrease the cost of inflation insurance for long-horizon investors. The increased expected return potential generated through the introduction of Alternative Investments to TIPS also allows global performance expectation and better risk management properties. This paper extends their strategy to Canadian market, but for the different investor group - general investors without active liability management needs. My study focuses on the inflation hedging capacity and the optimal asset mix of the investment portfolio including Canadian Real Return Bonds added by Real Estates and Commodities. The results support that those investment portfolios offer cost effective protection for Canadian investors during inflationary periods and also provide some diversification benefits.