1. Infrastructure investments have become an attractive asset class due to their potential for enhancing portfolio efficiency, and are particularly appealing to long-term institutional investors such as pension funds and insurance companies.
2. The peculiar nature of infrastructure investment is characterized by features such as long economic life, stable and predictable operating cash flows, low correlation with other assets and the overall economy, large investment scale and inelastic demand, low volatility of cash-flows, and low default rates.
3. The classic mean-variance framework is myopic in nature and not optimal for multi-period investment horizons with time-varying investment opportunities. Intertemporal hedging demand arises from the variation in expected returns over time for long-term investors, which can be exploited through predictability of equity returns.
The article "Beyond traditional financial asset classes: the demand for infrastructure in a multi-period asset allocation framework" provides an overview of the potential benefits of infrastructure investments as an asset class for long-term institutional investors. The authors highlight the unique characteristics of infrastructure investments, such as stable and predictable cash flows, low correlation with other assets, and low default rates, which make them attractive to investors seeking portfolio diversification.
However, the article has several limitations that need to be addressed. Firstly, it is biased towards promoting infrastructure investments as a lucrative portfolio component without providing sufficient evidence to support this claim. While the authors cite some studies that document the long-term behaviour and portfolio characteristics of listed infrastructure, they do not provide a comprehensive analysis of the risk-return profile of infrastructure investments compared to other asset classes.
Secondly, the article overlooks some critical points of consideration when investing in infrastructure projects. For instance, infrastructure projects are often subject to regulatory risks, political risks, and environmental risks that can affect their profitability and sustainability over time. Moreover, infrastructure projects require significant upfront capital investment and have long gestation periods before generating positive cash flows.
Thirdly, the article does not explore counterarguments against investing in infrastructure projects. For example, some critics argue that private sector involvement in public infrastructure projects can lead to higher costs for consumers due to profit-seeking motives by private investors. Additionally, there are concerns about social equity issues related to access to essential services such as water and electricity when these services are provided by private companies.
Finally, while the article acknowledges that predictability of returns is an important factor for long-term investors' intertemporal hedging demand', it does not provide any evidence on how predictable returns are for infrastructure investments compared to other asset classes.
In conclusion, while the article provides useful insights into the potential benefits of investing in infrastructure projects as an asset class for long-term institutional investors seeking portfolio diversification opportunities; it has several limitations that need to be addressed. These include biases towards promoting infrastructure investments without sufficient evidence supporting this claim; overlooking critical points of consideration when investing in infrastructure projects; failing to explore counterarguments against investing in these projects; and not providing evidence on how predictable returns are for this asset class compared to others.