Investors seeking high returns away from ordinary stocks and bonds have made their best bets in alternatives ranging from corn and silver futures to property investments. Bloomberg Markets has ranked the best-performing alternative investments over the past three years and key to the findings are high returns for property, private equity and exotic investments such as coins, wines and vintage cars. Not so surprisingly, hedge funds and funds of funds continue to disappoint investors with weak returns.  

But looking closer at the numbers, it is clear that assets overseen by hedge funds are a strong alternative investment, this year alone global assets increased to $1.87 trillion from $118 billion in 1997 - most of it stemming from pension funds, endowments, family offices and sovereign wealth funds.

More importantly, real estate 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-capitalisation REITs returned 17.3 per cent annually from 31 March 2010, to 28 March 2013, jumping higher than the Standard & Poor’s 500 Index and besting private equity, which returned 15.2 per cent.

Popular REITs include those firms which invest in shopping malls, self-storage units, industrial plants, health care, retail and Asian real estate. All these categories enjoy +20 per cent annual returns over the three year index period.  Although REITs are still largely a US phenomenon, they are also a growing asset class in Europe and Asia. REITs globally raised $22.6 billion in the first quarter of the year, moving to surpass the record $73.3 billion collected in 2012.

Yet the Bloomberg's ranking cautions that real estate continues to be a volatile investment, with REIT prices rising and falling along with movements in the larger economy. This was most clear in May, when bond prices plummeted after US Federal Reserve chairman Ben Bernanke announced that the Fed might slow its debt-buying programme. There is also concern that when central banks start raising interest rates, the new property boom might come to a quick end.

On the other hand, hedge funds, once the quintessential alternative investment, have been disappointing investors for years, delivering a mediocre 3.3 per cent return from macro funds from 2010 to 2013. Fund-of-funds operators, who try to find the best performers, have done even worse, with an average annual loss of 3.8 per cent. More than 600 funds of funds (25 per cent) have gone out of business since 2007, with assets under management in hedge funds declining 13 per cent in that period.

Instead, the best-performing unconventional investments, are to be found in commodities and collectibles, such as vintage cars, stamps, contemporary art and wine, according to Bloomberg Markets. Corn has been a particularly strong commodity, returning 33.8 per cent in the three years. In comparison, commodities features on average gained a weak 3.1 per cent.

Lastly, private equity is bigger than ever these days. Global private-equity holdings surpassed $3 trillion of assets under management in 2011 for the first time, according to London-based research company Preqin, and have continued to grow. With major industry players looking to penetrate corporate retirement funds, the private equity sector may be on the cusp of even greater returns in the coming years, making it the one to look for in alternative investments.