Hedging Against Inflation: Are Listed Infrastructure Assets Effective?

In this article, we examine the inflation-hedging potential of listed infrastructure. To do so, we determine the optimal portfolio allocation that minimizes the downside risk, for a given inflation-linked target return, by using different partial lower moments as risk metrics. We simulate returns by a GARCH-copula model to flexibly allow for well-known return properties. We assess the potential of both an overall infrastructure index and sector-specific indices representing transportation, telecom, and utilities. We find that listed infrastructure not only improves a portfolio’s inflation resilience but also increases its expected return. This result might be particularly relevant for long-term, liability-driven investors such as pension funds and insurance companies.