Real estate was the best-performing broad asset class in 2006, returning investors 36.1%, according to the Dow Jones Wilshire Reit Index. Real estate has been a hot asset class for the past three years now, with a 27.4% three-year return.

The second best was emerging-market equities: the MSCI Emerging Markets Index returned 32.2% last year. Pimco compiled and disseminated these public broad market indices as a way to reflect upon last year and get ideas about the next.

Non-US equities provided strong returns for investors, but the US market remained surprisingly buoyant, particularly the small-cap sector which had been written off last year.

Aside from property, alternative investments had a disappointing year.

Hedge funds returned 13.9%, according to the CSFB/Tremont Hedge Fund Index. This isnÆt bad on an absolute-return basis, but as an asset class, they lagged broad US equities: the S&P 500 returned 15.8%.

The news gets worse for private equity (8.9% for the Cambridge Associates US Private Equity Index) and venture capital (7.5% for the Cambridge Associates US Venture Capital Index).

Private equity didnÆt fare well on a risk-adjusted basis either. Hedge fund volatility was 4.2% while private equityÆs was 3.5%. Private equity was modestly less volatile but considerably under-performed. Considering the asset class returned 27.4% in 2005, private equity has definitely stumbled, perhaps reflecting the huge number of new players and funds in the sector, which have chased out the asset classÆ return opportunities.

The news gets downright scary for commodities, which proved the worst sector in 2006. The Dow Jones AIG Commodities Index scraped together a measly 2.1%, while the Goldman Sachs Commodities Index, with its emphasis on energy, fell a bone-jarring -15.6%. Considering the DJ AIG returned 21.4% in 2005, last year was truly awful for commodities index investors.

Cash returned 4.8% last year, just to rub salt in the wounds. The only asset class to yield less for investors was Treasury inflation-protected securities, which eked out 0.4% in 2006. Within fixed income, tight spreads limited the ability of most asset classes to perform, and the Lehman Aggregate delivered only 4.3%. But US high yield was the blazing exception, delivering 11.6% (with only 2.2% volatility).

While hedge funds overall couldnÆt match the S&P500, there were certain categories that did well in 2006: emerging-market long/short strategies gained 20.5% (with 8.9% volatility), multi-strategy funds returned 16.4% (far more attractive given volatility of 3.5%), and event-driven plays (including distressed) returned 15.6% (and volatility of only 3.0%). The bull equity markets were not kind to dedicated short strategies, however, which lost 6.6%.

Real estate remains the most exciting story, however, perhaps because it hasnÆt been the focus of attention like private equity and hedge funds have been. The Reit sector has grown quickly in some markets including Japan, but not to the same degree. Perhaps two consecutive years of terrific performance will make real estate the hot sector for business activity in 2007. If so, however, investors should brace themselves, because if other alternative asset classes are anything to go by, the splendid results wonÆt last.