equilibrium, and can therefore be especially attractive. The equilibrium framework provides a reference for expected excess returns such that returns greater than that reference are attractive. In particular, as we will show in this chapter, assets with uncorrelated returns that also have a positive expected excess return will add significant value to a portfolio that otherwise is structured to create returns through exposures to equilibrium risk premiums. The investment management industry has developed an unfortunate terminology for discussing uncorrelated assets and other sources of active risk. What is unfortunate is that the defining characteristic of being statistically uncorrelated with the market portfolio is often unclear in the description of investment products. Moreover, many products whose returns are manifestly positively correlated with the market are nonetheless marketed as being either uncorrelated or market neutral. Because uncorrelated assets are not part of the set of standard asset classes, they are generally included in a category that is referred to as "alternative" assets. But the alternative asset class also includes many other assets that are highly correlated with the market portfolio. "Alternative" generally refers to the fact that an asset is not part of a standard asset class; it does not imply low correlation with the market. Examples of alternative assets with significant positive correlations with the market include private equity, real estate, and many hedge funds. On the other hand, many other alternative assets are indeed basically uncorrelated with the market portfolio. Examples of these would include commodities, managed futures accounts, and many truly market-neutral hedge funds. The best way to identify uncorrelated returns is to gather data and compute correlations with market returns. In addition to these alternative assets, there are many other potential sources of uncorrelated returns with positive expected returns. For example, the active risks coupled with benchmarks in the form of active management assignments are generally uncorrelated with the underlying asset classes. Finally, the active returns in many types of overlay strategies, such as active currency management and global tactical asset allocation, are generally uncorrelated with the market. The difference between correlated and uncorrelated alternative assets is significant. Uncorrelated assets add very little risk to the portfolio, at least at the margin. In most contexts where investors are contemplating investments in alternative assets, there is an implicit assumption that the asset has a positive expected excess return. Adding positive expected return and not adding risk always improves the risk/ return characteristics of a portfolio. In this sense, uncorrelated investments have a relatively low hurdle rate-the expected return only has to be positive. For assets positively correlated with the market, an assumption of a positive expected excess return makes sense. For positively correlated assets, a positive return is an equilibrium phenomenon: It is a risk premium that ought to exist. The problem with assets that are correlated with the market is that they generally add risk to the portfolio, even at the margin. The question for investors in this context is whether the risk premium is large enough to justify the added risk to the portfolio. For uncorrelated assets, on the other hand, there should be no such presumption of a positive expected excess return. The assumption of a positive expected excess