“Why would anyone invest in the stock market?”

Hamilton “Tony” James looked up from his notes and peered out at the audience over the rims of his glasses. The investors seated in the chandelier-adorned meeting room of New York’s Waldorf-Astoria hotel had been in their chairs for hours. Yet James paused to let his point sink in. Someone laughed. James, president since 2005 of Blackstone Group LP, was stone-faced.

The occasion was Blackstone’s third annual investor day, Bloomberg Markets magazine reports in its August issue. The firm is the world’s largest manager of so-called alternative investments, with $218 billion under management. It runs private-equity funds and hedge funds, invests heavily in credit securities and owns vast expanses of real estate. One of its properties is the Waldorf itself.

When James finally answered his own question about stocks, he told the audience they were a fool’s game compared with Blackstone’s investment funds, which have returned at least 15 percent annualized during the past 26 years, according to the firm. A good investment lately is Blackstone. The firm’s shares returned 89.4 percent during the 12 months ended on June 10, while still trading below their initial offering price in 2007.

Alternatives such as those managed by Blackstone have gained in popularity during the past 20 years as investors searched for alpha -- returns uncorrelated with and higher than those offered by the broad stock and bond markets.

Celebrity Investing

The people who run companies specializing in alternatives - - including billionaires such as Steve Cohen, Henry Kravis, John Paulson and Blackstone co-founder Steve Schwarzman -- have become celebrities. Assets overseen by hedge funds alone increased to $1.87 trillion this year from $118 billion in 1997 -- much of it from pension funds, endowments, family offices and sovereign-wealth funds.

Virtually every alternative category crashed in the financial meltdown of 2007 to 2009 -- none more severely than property, with housing and commercial real estate prices falling as much as 40 percent.

Yet as markets have recovered, it’s real estate that has led the way. The sector dominates Bloomberg Markets’ ranking of alternatives, which shows that real estate investment trusts -- which pool investor money to buy property and are sold like stocks -- have gained more than any other alternative category in the past three years. Large-capitalization REITs returned 17.3 percent annualized in the three years from March 31, 2010, to March 28, 2013, besting private equity, which returned 15.2 percent.

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