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Alternative Alternatives

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For other titles in the Wiley Finance seriesplease see www.wiley.com/finance

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Alternative Alternatives

Risk, Returns and Investment Strategy

Sona Blessing

A John Wiley and Sons, Ltd., Publication

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This edition first published in 2011C© 2011 John Wiley & Sons Ltd

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Library of Congress Cataloging-in-Publication Data

Blessing, Sona.Alternative Alternatives : risk, returns and investment strategy / Sona Blessing.

p.cm.ISBN 978-0-470-68396-5 (Hardback)1. Investments. 2. Speculation. 3. Risk. 4. Portfolio management. I. Title.HG4521. B54 2011332.63′2–dc22

A catalogue record for this book is available from the British Library.

ISBN 978-0-470-68396-5; ISBN 978-1-119-99168-7 (ebk);ISBN 978-1-119-97352-2 (epub); ISBN 978-1-119-97353-9 (emobi)

Typeset in 10/12pt Times by Aptara Inc., New Delhi, IndiaPrinted in Great Britain by TJ International Ltd, Padstow, Cornwall, UK

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http://www.wiley.com


This book is dedicated to

My husband MarkusMy father Dilip, my mother Jyoti, my sister Rupa and

my friend Vreny

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Contents

Preface ix

Acknowledgements xi

A Note on How to Use This Book xiii

Introduction xv

Epilogue xxi

1 Timberland 11.1 Introduction 11.2 Statistics on Investable Timberland 11.3 Asset Characteristics 51.4 Investment Drivers 61.5 Return Drivers 91.6 Perceived Risk 201.7 Real Risks 211.8 Measuring Risk and Returns: Science, Art, ‘Boots on the

Ground’ 221.9 Investment Objective 251.10 Investment Strategy 271.11 In Practice 291.12 Country Case Studies 351.13 Species Case Study 491.14 Emergence and Outlook 521.15 2010 And Beyond 531.16 Opportunities and Challenges Facing Timberland

Investors 551.17 Conclusion 56

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viii Contents

2 Insurance Linked Risk Transfer 572.1 Introduction 572.2 Classification 602.3 Asset Characteristics 612.4 Risks 622.5 Return Drivers 642.6 Constraints 642.7 The Players 642.8 Evolution 662.9 Non-Life Insurance Linked Risk Transfer 682.10 In Practice 852.11 Life Insurance Linked Risk Transfer 872.12 Pandemic-related Insurance Investing – Extreme

Mortality Risk 98

3 Asset-Based Lending 1033.1 Introduction 1033.2 Aviation Finance, Loan-Based Lending, Leasing 1083.3 Ship Financing, Leasing, Investing 1143.4 Trade Finance 1203.5 Litigation led Investing 1303.6 Lending Against Hospital Receivables 1413.7 Film Financing 1443.8 Music Investing 1523.9 Appendix 158

4 Collectables 1654.1 Introduction 1654.2 Investing in Art 1664.3 Case Study Series (with Philip Hoffman, The Fine Art

Fund Group) 1724.4 Investing in Photography 1844.5 Investing in Wine 1884.6 Investing in Vintage Cars 199

5 Extraction Strategies 2115.1 Volatility Investing 2115.2 Behaviour Finance 215

6 Place in a Portfolio 225

Further Reading 231

Index 235


Preface

‘Risk is inherent in every investment’

The financial crisis that began in the summer of 2007 would suggest that understressed market conditions supposedly ‘noncorrelating’ asset classes, such ascommodities back then, tended to ‘converge’. Why was this?

In a de-leveraging environment, owing to their above-average liquidity, com-modity positions were among the first to be unwound. Their rapid fire ‘sell-off’inadvertently triggered the convergence of multiple risk factors, causing their‘normally noncorrelating’ behaviour to revert. Ironically, such phenomena oc-cur precisely when supposedly ‘noncorrelating’ asset classes are meant to de-liver. Not only have they tended not to, but the occurrence of such a convergenceis becoming more frequent.

The collapse of Lehman Brothers that ensued in the fall of 2008 hastenedthe credit crisis and only served to reinforce that when liquidity requirementsneed to be fulfilled money will be withdrawn, firstly, from where it easilycan be (the automatic teller machine effect) and then, even if it bears a cost,from wherever it is. As has been witnessed, such forced withdrawals exerteda downward pressure on and across a spectrum of asset classes, leading tofurther withdrawals, which, in turn, intensified a negative asset price spiral andcontributed to the most severe crisis since the Great Depression.

Irrespective of when the next financial crisis occurs there is a need to be cog-nisant of the changing investment landscape and the repercussions associatedwith being market participants in a complex, highly interconnected world:

• Where information exchanged on the robustness of economies, its marketsand its players is virtually instantaneous.

• Where technology plays a pivotal role in not just running markets, but canand has been disruptive.

• Where the impact of human error (lapse of concentration, ‘fat-finger’, etc.)should not be underestimated.

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x Preface

• Where institutions will likely continue to be ‘too big to fail’ and ‘too inter-connected to let them collapse’.

• Where the existing mismatch between investable risk premia and capitalinflows is expected to widen further, resulting in efficient markets packed withovercrowded trades, making it harder to generate returns and encouragingthe use of leverage.

• Where the frequency and intensity with which financial crisis occur is pre-dicted to rise.

• Where market volatility is slated to rise.• Where speculators have the ability to, do, can and will move markets.• Where the velocity at which money moves has a bearing on leverage levels

in the financial system.• Where ‘. . . public debt ratios in the advanced economies at present are on an

unsustainable path’.1

• Protection of principal led insurance already does and is slated to cost more.

With this as backdrop, were there and are there still, certain asset classes andstrategies that were able to deliver-in-line positive returns through the crisis,still do, and will likely continue to perform?

This book identifies and elaborates on which they are: ‘Alternative Alterna-tives’ – the risk, returns and investment strategies associated with them.

1 ‘Three post-crisis challenges’, Remarks by John Lipsky, First Deputy Managing Director,International Monetary Fund, at the seminar in Honour of Mr Marcel Wormser, Banque de France,Paris, 1 March 2010; http://www.imf.org/external/np/speeches/2010/030110.htm. ‘... Already in2010, the average debt-to-GDP ratio in advanced countries is projected to have reached the levelprevailing in 1950, in the aftermath of World War II. This surge in public debt is occurring at a timewhen pressures on health and pension spending are starting to accelerate, reflecting the combinedeffects of aging populations and of rapidly rising health care costs. On the basis of current policiesand existing cost trends, we project this spending to increase by an additional 4–5 percentagepoints of GDP during the next two decades. Thus, it is easy to conclude that public debt ratios inthe advanced economies at present are on an unsustainable path.’

http://www.imf.org/external/np/speeches/2010/030110.htm


Acknowledgements

I would like especially to thank Matthias Knab at Opalesque who believedin my vision and gave me the opportunity to conceive and build A SQUARE(acronym for alternative alternatives = a2), globally still the first and onlyinvestment research platform dedicated solely to alternative alternatives.

I would also like to thank:

• Peter Meier and Regina Anhorn at The Zurich University of Applied Sciences(zhaw), for their ongoing support

• Bob Izlar, Michael Clutter and the faculty members at Center for ForestBusiness, Warnell School of Forestry and Natural Resources, University ofGeorgia, for sharing their invaluable insights, on-going support and assistance

• Kelly M. Droege, IWC, for sharing his insights and thoughts• Dennis Neilson, Dana Limited, for his ongoing support• Ross Gilardi, Bank of America Merrill Lynch, for sharing his insights• Swiss Re Sigma team, for their assistance• Michael Stahel at Clariden Leu, Karsten Bromann at Solidum Partners and

Daniel Ineichen at Secquaero Advisors for their ongoing support and insights• Barney Schauble, Nephila Capital, for his feedback and insights• David Rawson-Mackenzie and Pollyanna Wan, Group Centurion, for their

feedback and insights• Heinz Kubli, Fundablis, for sharing his insights• Santo Volpe, for his feedback and invaluable insights• John Willingham, Macquarie Airfinance, for his feedback and invaluable

insights• Richard Field, Juridica Management, for his thoughts and insights• Paul Barbour and Phil Drew, M2M Management Ltd, for their feedback and

insights• Rolf Blumer, Swiss Shipcapital Invest, for his assistance• Valerie Raad, IGG, for her ongoing support• James Swarbrick at Aegis Capital Partners LLP, for his insights

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xii Acknowledgements

• The Wine Investment Fund team, for their insights• Philip Hoffman, The Fine Art Fund Group, for his inputs and ongoing support• Dietrich Hatlapa, Historic Automobile Group, for his feedback and insights• RM Auctions, for their ongoing support, inputs and insights• Lee W. Sanning, University of Wyoming, for sharing his insights and thoughts• Mark James and Louisa Symington-Mills, RBS, for their interest and support• Andre Bigler, IBM


A Note on How toUse This Book

In researching alternative alternatives, I have followed a pragmatic approachthat relies on a combination of: data collection, monitoring, SWOT analysis(i.e. identifying and understanding the strengths, weaknesses, opportunities andthreats), case studies and, most importantly, drawing on the experiences andexpertise of those that ‘walk the talk’.

Not only has, and does, this real world approach help in ‘de-mystifying’ thewidely held perception alternative alternatives have of being ‘esoteric’ assetsand strategies but, more importantly, it adds a ‘practical log’ dimension thatmakes comprehending the associated risk–reward profiles, drawbacks, strategicscope, integration potential as an investment (including within a portfolio)feasible – why and how they have fared through the most recent credit crisisand how they are expected to fare going forward.

In a similar fashion, the contents of this book intend to make alternativealternatives accessible, not just for current and prospective investors lookingto broaden the scope of their asset allocation universe but for all those seekingto understand and be informed on what these assets and strategies are. It iswritten to serve as a compass that lays particular emphasis on identifying thesource of risk, return drivers, peculiarities and persistence, scalability, caveatsand challenges associated with investing in these assets and strategies.

Alternative alternatives, as defined in this book, are still in their nascency,which means that statistically significant data is often incomplete, lackingand scarce. Assuming it were available, caution needs to be exercised in itsinterpretation, as by definition a lot of these asset classes and strategies arecharacterised by idiosyncratic risk – i.e. measuring and pricing those occurringin nature, regulatory, legal, valuation, illiquidity-related risk, among others.This is as much art, science and ‘craft’.1

1 ‘Absolute returns revisited’, April 2010, by Alexander Ineichen, ‘Risk management is a craft,neither a science nor an art. It works on the premise of learning by doing.’

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Introduction

What are Alternative Alternatives?

My working definition for this book has been based on unconventional, non-traditional, nonmainstream hedge fund investments and strategies whose riskprofiles and return drivers are atypical, unique and/or idiosyncratic in nature.

Given that financial literature tends to define alternative investments as anegation to traditional assets or, in other words, if core asset classes includeequities, bonds, real estate, commodities and currency, and if these are com-pounded by their respective derivatives, then alternative investments are the re-sulting permutations and combinations thereof – such as hedge funds, structuredproducts, etc. If we were to take this thinking a step further, then ‘alternativealternatives’ could be considered a ‘negation’ of alternative investments.

Market risk Non financial occurring risks - e.g. in nature

Their respective derivatives

Hedge funds, Strutured products: Alternatives

Core assets: stocks, bonds, commodities, real estate, currency

Alternatve Alternatives

Idiosyncratic risk

Real assets - e.g. collectables

Source: Sona Blessing

Why Alternative Alternatives?

The raison d’etre for alternative alternatives and my hypothesis has been:

– In theory, market risk (also referred to as systematic risk or beta) can beisolated and measured.

– By default, a risk originating outside financial and capital markets (as innature) should not be affected by it.

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xvi Introduction

– Clearly, neither the biological growth of trees nor the occurrence of natu-ral/weather phenomenon are influenced by events playing out in financialand capital markets. Quite simply, trees will continue to grow provided theyhave adequate sunshine, water, air and the appropriate soil conditions.

– Natural catastrophes such as earthquakes will continue to strike without ourability to accurately time and/or predict their occurrence.

– Potentially, each of the above, if made investable can provide exposure to aspecific, nonreplicable, unique risk premia that could deliver returns.

Put differently, if the source of risk (inefficiency/inefficiencies – risk premia)rests outside the domain of mainstream financial markets, then it should beinsulated from the vagaries of the financial market – as it has nothing to dowith this market. It is important to recognise that even though the source of riskresides outside the market, the risk is real and, if borne, so are the prospects ofbeing compensated for it. Even so, an exposure to such risk is not immune toa performance pull-back, as its risk profile is different and its return drivers ortriggers are idiosyncratic.

In practice and in the real world it is virtually impossible to get ‘exclusive’exposure to naturally occurring sources of risk. However, exposure to suchrisk can be calibrated – and, if taken on, offers access to a source of partiallyinhomogeneous return. Similarly, research I have undertaken reveals (affirmedby the occurrence of the credit and sovereign debt crisis) that select sourcesof idiosyncratic risk, although not originating in nature, are equally capable ofoffering unique risk–return profiles, provided the risk transfer process has beenstructured ‘correctly’.

RISK ORIGINATION

Naturally Occurring Sources of Risk

The Biological Growth of Trees

The biological growth of trees is a naturally occurring phenomenon, i.e. treesgrow (they increase in size and they gain in volume) independent of andirrespective of financial markets. However, for this to function as an investment,the underlying assumption being made is that the implied price of a tree andthe land it stands on are not zero. At any given point in time, the actual pricebeing paid for a ‘tree’ (and/or the land it stands on) is still determined by thelaws of demand and supply.

Natural Catastrophes

The occurrence, or not, of a natural catastrophe such as an earthquake could de-termine the positive/negative payout of investing in insurance linked securities


Introduction xvii

or, in the context of weather derivatives, a one degree rise or fall in temperaturecould be the ‘return’ driver. Clearly neither the occurrence of an earthquakenor a shift in daily temperature is remotely influenced by events playing outin financial markets, as both originate in nature. However, investing in ‘just’the occurrence of an earthquake or a shift in temperature is at best impossiblewithout a financial vehicle.

For the process of extracting a return/performance from such naturally oc-curring sources of risk, or the wrapper/ instrument that make it an investableproposition, is unfortunately where financial, market contagion starts creepingin. An investment vehicle such as a cat bond that has exposure to, for in-stance, an earthquake, has, among others, a component of model risk, interestrate-related risk (LIBOR) and counterparty risk.

Nonnaturally Occurring but Idiosyncratic Sources of Risk

Asset-Based Lending (ABL): ‘Secured’ Credit Risk Transfer, or LendingMoney Against Collateral

In the case of such strategies, the source of risk is not entirely isolated from andalien to financial markets as has been historically evidenced during the GreatDepression. Often referred to as ‘merchant banking in a hedge fund garb’,ABL is when money is lent against a tangible asset – or cash flow generatingcollateral. The reference here is to private loans with no securitised secondarymarket.

Such ‘coupon-clipping’ (cash flow based) return streams are generated bytaking on idiosyncratic risk (primarily credit). These strategies tend to hingearound the creditworthiness of a borrower (and the ‘quality’ of collateral),but clearly they are also exposed to other risks, which include, but are notconfined to, pricing and valuation, duration, liquidity, legal, structure andregulatory. Such investment opportunities have included trade and commercefinance, shipbuilding and leasing, aviation and rail leasing, claims (insurance,legal, medical, hospital, etc.), infrastructure – public and private finance, en-tertainment finance across the entire chain (pre-budget, post-film distribution –movies, music, libraries, artists, royalties, etc.) and others such as bridge loansand syndicated loans.

Collectables

Idiosyncratic risk, scarcity-related premia, the persistence of inefficient marketsand the ability to identify, verify, evaluate, source and secure ‘sought-after’objects are the main drivers of return. Whether or not such ‘scarcity led’,‘emotional’ investments in real, ‘tangible’ assets, as in art, wine, stringedmusic instruments, vintage cars, rare coins, stamps and other collectables, areinfluenced by the cyclicality of financial markets continues to be debated.


xviii Introduction

For instance, ‘While auction prices for contemporary art dropped as much as50 percent in the crisis, values of the most desirable classic modern works werelittle changed or rose, dealers said.’1 Select art works of historical relevancehave found favour because they are perceived as a ‘store’ of value, particularlywhen there is considerable uncertainty shrouding an economic recovery, whencratered interest rates are likely to persist and there is no opportunity cost. Theycan also serve as a hedge in anticipation of a hyperinflation-like scenario.

Extraction Strategies

Volatility and Behaviour Finance

Then there are strategies, e.g. volatility driven, that find their origin in the market(across asset classes such as equity, bonds, currency, real estate, commodity),but their capturable source of risk premia or performance lie in the extractionprocess. Irrespective of the direction in which markets move, it is the frequencyand scale of those moves that strategically determine when and whether gainswill be made.

Likewise, the ability to formulate strategic and tactical investment movesto generate returns that are based on interpreting and analysing scientific ob-servations (sociological–economic–political–psychological), on why and howhuman beings tend to behave under various market conditions, as well as ac-tively exploiting informational inefficiencies, e.g. by trading market pricinginefficiencies to render performance.

PECULIARITIES

The above-listed investment opportunities and strategies seem to share certain‘alternative alternative’ characteristics:

• Nonreplicable risk or risk that cannot be replicated easily. It is difficult toreplicate the actual occurrence of a natural catastrophe or the biologicalgrowth of a specific 25-year-old tree.

• Idiosyncratic. As illustrated by the following excerpt in the concept of MarineInsurance2:

In any event, disregarding shifts in income, importance in terms of premiumproduction and market shares, ships will continue to sink, be stranded, collideand catch fire sometimes, and cargo will never cease to break, disappear, rustand get stolen. This fills our hearts with happiness, since it assures our futureright to exist. There will always be marine insurance!

1 Scott Reyburn, ‘Giacometti sculpture fetches record $103.4 million’, Bloomberg, 3, February2010.

2 Walter M. Mellert, Marine Insurance – Technical Publishing Marine, Swiss Re.


Introduction xix

Whereas there are probably 13,765,311 brick houses owned by middleclass blue-collar working families with a fire hydrant within 100 m, likelihoodhas it that there will only be one 35-year-old thoroughly rusted steamship,managed by a Liechtenstein managing company for Japanese interest, flying aPanamanian flag and employing an illiterate captain and an equally uneducatedcrew in turn entrusted with a sensitive cargo of milk chocolates to be transportedfrom Rotterdam across the equator to Rio de Janeiro in mid-December insuredagainst all risks of course. No doubt you will agree that this scenario representsan absolutely unique combination of individual risk factors making the riskas a whole not repeatable, at least not within a reasonable time period. Thelogical conclusion to be drawn from this would no doubt be that a book ofmarine insurance business is a collection of non-homogeneous risks, just veryloosely related by the fact that somewhere along the line, there is some formof transport involved.

Statistically, this implies that correlation of data will be low, whereas fluctu-ations of the unpredictable kind will be high – not exactly the mathematician’sdream.

On a more down-to-earth note, it further illustrates that marine insuranceis a risky business, difficult to assess and therefore requiring a high degree ofexperience, know-how, imagination and, last but not least, ‘gut feeling’ fromits underwriters.

• Inefficiencies. Their markets tend to be inefficient and are driven by factorssuch as, in the context of investing in collectables, who is looking for whichpainting, rare wine bottle? How much are they wiling to pay? Who is adistressed seller? Is it a verified ‘original’? How scarce is it?

• Heterogeneity. In the context of micro life settlements – longevity/mortalityrisk – each policy is unique or in the case of asset-based lending strategies,each loan needs to be evaluated and structured individually.

• Low-to-no correlation, as in the case of naturally occurring catastrophes,such as winds in Europe, and an earthquake occurrence in the US, Japan, etc.

• Such risk premia are not always apparent – they can be disguised, con-cealed and so need to be well understood, carefully researched and analyseddifferently.

CONCLUSION

I have always held, and continue to believe, alternative alternatives will playa meaningful role in the context of an investment landscape that has and willcontinue to be in flux. As the quest for ‘all-weather’ performance deliver-ing strategies intensifies, not only have alternative alternatives drawn renewedinvestor and manager interest but more importantly they have witnessed inno-vation and growth in assets under management.

Although alternative alternatives still continue to remain out of bounds andoff the radar screen for some, and as an asset class is considered to be in


xx Introduction

its infancy by others, it is only a matter of time before they are more widelyembraced and implemented within portfolio and asset allocation. On the supplyside there are signs of evolution, as the broader base further decomposes intoisolatable, investable niches – e.g. the possibility of investing in a species suchas teak in the context of timberlands, loan-based lending against fine foodand wine as collateral, as also the emergence of exchange listed investmentopportunities with alternative alternative strategies as underlyings (litigationled investing, in coins, etc.).

A word of caution is not entirely out of place. Some of these strategies mightnever assume ‘mainstream’ status; it is possible that some may remain supplyconstrained and, on a relative basis, may continue to be more ‘illiquid’ than theirtraditional asset counterparts. In addition, the underlying risk in some instancescould prove to be deceptive and more complex than bargained for. To go fullcircle, however, I believe it is these very characteristics and inefficiencies thatwill enable alternative alternatives to afford diversification and offer a differentrisk return profile to that obtained from mainstream investments.


Epilogue

A majority of these alternative alternative assets and strategies have continuedto deliver ‘characteristic’, in-line, positive performance irrespective of the creditcrunch and the ensuing recessionary environment.

• Timberland has continued to ‘grow’ increase in volume and value terms.• Insurance linked strategies (life and non-life) have delivered a positive per-

formance also for the year 2008, including those that partially suffered owingto the collapse of Lehman (counterparty risk exposure as Lehman was oneof the custodians of the special purpose vehicle accounts).

• Loan-based lending strategies have even benefited from the enhanced rigidityin regulation applicable to banks and other formal money lending institutions.

• Collectables of historical significance have maintained or appreciated invalue.

• Volatility trading strategies have, depending on the underlying traded, andselectively, delivered in-line performance.

• Behavioural finance conditioned funds – selectively – have also deliveredin-line performance.

On occasions where there has been a performance setback, it has been largelyowing to structural issues. Paradoxically, even though most of these strategiesare ‘stereotypically’ perceived as being ‘illiquid’, if needed to be exited theyhave proved to be remarkably stable and ‘liquid’. In spite of this fact, it isimportant to be realistic about managing liquidity needs, particularly in thecontext of investing in alternative alternatives.

Understanding fully an asset’s or the strategy’s source of risk (its origin),characteristics – peculiarities (including valuation methodology, illiquidity,uniqueness), return drivers, persistence, scalability, shortcomings, terms andconditions – systematically isolating them from the risk posed by the investablewrapper/investment vehicle (structural) – operational, legal, regulatory, tax,currency, manager, market risk, liquidity, etc. – is imperative.

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xxii Epilogue

Alternative alternatives’ underlying investible source of ‘pure/core’ risk has,and is capable of performing (positively), given its fairly high ‘certainty ofreturns dimension’. These assets and strategies can offer ‘real’ diversificationand provide a differentiated risk–reward profile. This has played out throughthe financial (liquidity) crisis and in so doing validates my hypothesis.

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Timberland

1.1 INTRODUCTION

Growing a tree isn’t rocket science . . . even so, investing in timberland asan asset class is structurally unique owing to, on the one hand, its inherentbiological drivers characterised by their diversity and complexity and, on theother, its interconnectivity to markets via the globalisation of forestry commerceand environmental issues.

Perceived as being obvious, the real risk posed by weather (natural catas-trophes) and fire, for instance, have, based on recent studies and contrary tocommon belief, had only a marginal impact on performance.1 While their oc-currence and impact should not be underestimated,2 it is as imperative fully tounderstand, thoroughly research and recognise the significance of the ‘less ob-vious’ risk factors such as those posed by, among others, valuations – appraisals(inventory), overpaying for land, timber price led dynamics in the short, mediumand long term and the impact of different taxable entities/taxation regimes onreturns. Often it has been or is precisely such ‘covert’ risk that tends to be over-looked and can be misunderstood, leading to an unanticipated and significantsetback in realised returns.

1.2 STATISTICS ON INVESTABLE TIMBERLAND

Defining the investable timberland universe is a challenge as:

• There are variations in data based on how one chooses to define sensitivity ledexclusions, such as a forest or an investable forest, whether legal, regulatoryor political.

• Data tends not to be ‘current’, is often incomplete, not standardised, may bedeliberately held back (for political, tax and other reasons), may be inaccurate,unreliable or biased, and may not be global in its scope.

• Methods tend either to use data solely drawn from the Food and AgriculturalOrganisation (FAO) or a combination that is supported by and additionallyincludes on-the-ground intelligence data and/or research studies includingaccess to aerial-based data.

1 The average annual loss for physical risk is 0.03 % (statistics of major TIMOs, REITs andWeyerhaeuser per James W. Sewell Company, Maine).

2 The difference between the US Pacific Northwest Douglas fir being worth a fortune and beingdead is ∼ +3C winter temperature (Dana Limited).

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2 Alternative Alternatives

As a geographic guide, I have chosen to include an aerial snapshot of theworld’s intact forest land (IFL), which also frames environmental and conser-vation led issues (see Figure 1.1). According to Potapov et al.,3 the stipulateddefinition of the world’s forest zone is 55.9 million km2 or 37.3 % of the Earth’stotal land area. The authors estimate the global area of IFL within the currentextent of forest ecosystems (forest zone) to be 13.1 million km2 or 23.5 % ofthe forest zone.

Intact forest land (IFL) has been defined as an unbroken expanse of naturalecosystems within areas of current forest extent, without signs of significanthuman activity and having an area of at least 500 km2. The vast majority ofIFL are found in two biomes:

• dense tropical and subtropical forests (45.3 %) and• boreal forests (43.8 %).

The lowest proportion of IFL is found in temperate broadleaf and mixed forests.The IFL exist in 66 of the 149 countries that together make up the forest zone.Three of them – Canada, Russia and Brazil – contain 63.8 % of the total IFLarea. Of the world’s IFL area, 18.9 % has some form of protection, but only9.7 % is strictly protected, i.e. belongs to IUCN protected areas categories Ito III.

From an investor allocation perspective (IWC Research), timberland avail-able worldwide for institutional investment is as follows:

• It is estimated at being 3.95 billion hectares of forest.• Of this, it is estimated that 165 million hectares, or 4.17 %, is privately

investable, representing a value of approximately USD467 billion.• Investable public forest land is estimated at 922 million hectares, or 23.33 %,

representing a value of approximately USD249 billion;• The global timberland investable universe is estimated at being around 1.1

billion hectares.• This is 25 % of the total forest cover and is valued at approximately USD716

billion.• As of the end of 2008, different sources suggest that USD50 billion of

institutional money was invested in forest land, which represents roughly1/14th of the total available forest area.

From an institutional investor perspective there is scope and untapped potential.In the near future, other factors such as the privatisation of government

owned lands could and are expected to broaden this investable universe. China

3 Potapov, P., Yaroshenko, A., Turubanova, S., Dubinin, M., Laestadius, L., Thies, C., Ak-senov, D., Egorov, A., Yesipova, Y., Glushkov, I., Karpachevskiy, M., Kostikova, A., Manisha, A.,Tsybikova, E. and Zhuravleva, I. (2008), ‘Mapping the world’s intact forest landscapes by remotesensing’, Ecology and Society, 13(2). URL: http://www.ecologyandsociety.org/vol13/iss2/art51/.

http://www.ecologyandsociety.org/vol13/iss2/art51


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