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What are Alternative
Investments?
According to the CAIA Association, alternative investments are often
defined not by what they are, but
by what they are not.
That
is, an alternative investment is a position in something other than
a long position in either equity or debt.
Generally
speaking, the alternative investment markets encompass
hedge funds, venture capital and private
equity, real estate, and managed futures.
Alternative investment securities include
positions that define investment strategies within these broad
groupings.
As defined,
alternative assets are a subset of existing asset classes.
For example, a hedge fund
may be organized as a private company that takes both long and short
positions in equity securities, seeking to expand the investment
opportunity set available to long-only equity managers.
These opportunities include
capital appreciation, hedging, and diversification, among others.
Other distinguishing characteristics of alternative investments
are the regulations that surround the positions that comprise these
strategies, and the way that the gains and losses of these positions
are taxed.
To learn more: www.caia.org/ai
According
to Investor Home, alternative
investment is a term typically used by investors to describe
investments other than stocks and bonds.
Strategies commonly classified as
alternative investments include
private equity, leveraged buy-out (LBO) funds, arbitrage strategies,
hedge strategies, and "event driven" strategies.
Some people also classify real
estate and venture capital in the alternative investment category.
The benefits of alternative
investments include potentially higher returns, reduced volatility,
diversification benefits resulting from low correlation with other
investments, and in some cases more liquidity than some other
investments like real estate and venture capital.
Alternative investments are
often considered by institutional investors as alternatives with
potentially less risk than investments in venture capital,
commercial real estate, distressed securities, and junk bonds.
The drawbacks include potential one time
losses from rare events and high management fees.
While many institutional
investors allocate a small single digit percentage of their assets
to this class, some funds have been more aggressive and have
achieved favorable returns from larger allocations to alternative
investment.
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