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Alternative Investments Blog


June 10, 2022 ( Newswire) Alternative investments, sometimes called alternative or non-traditional investments, are those investments that do not fit neatly into the traditional categories of stocks, bonds, and cash. They include hedge funds, private equity funds, and real estate. The management of most, if not all, alternative investments are carried out by professional investment managers who, in many cases, are paid a combination of performance fees and management fees paid to them by their investors. Alternative investments have recently become popular with investors because of their higher returns, low correlation with traditional investments, and the possibility of making an immediate impact on a portfolio with a single investment.

Common Alternative Investment Types

1. Hedge funds

The primary goal of a hedge fund is to add value by minimizing risk and volatility to generate absolute returns. These funds are often marketed on the premise that they do not have to abide by the regulations that govern mutual funds and other investment companies, which allows them more freedom when it comes to investment strategy.

2. Private equity funds

Private equity funds are distinct from hedge funds. Instead of using leverage to generate returns, private equity funds invest in businesses and companies. The fund invests in private businesses in exchange for equity returned to the fund's investors when the company is sold or at the end of the period for which the fund holds it.

3. Real estate funds

Real estate investments are divided into two main types: commercial real estate (which buys and sell buildings) and residential real estate (which buys, sells, or holds individual homes). The investment objective of a real estate fund is similar to that of a hedge fund-to add value by minimizing risk and volatility. In addition, real estate funds are required to be organized as limited partnerships because they are not registered as investment companies and cannot accept all types of investors (such as mutual funds). Real estate funds do not face any restrictions on their investments or performance fee structure.

4. Private equity

Private equity is a form of alternative investment that may be accessed by private investors, as opposed to public investors. The fund manager actively manages many private equity funds through high-risk and high-return targeted strategies. Private equity funds provide financial capital to companies in exchange for an ownership stake in the business.

5. Private debt

Private debt is another form of alternative investment that private investors may access. It is debt issued by corporations or government agencies in the private sector and not the public sector. Much like securities, private debt comes in either bonds or loans.

6. Commodities

Commodities are raw materials such as oil, gold, copper, and corn. Investors buy or sell them for immediate delivery to obtain a higher price or a lower price later. Commodities are not exactly investments in the traditional sense; instead, they are speculative financial instruments that allow investors to speculate on future commodity prices.

7. Structured products

Structured products are a derivative used by some alternative investment funds to mitigate systemic risk associated with investing in the markets. This type of investment product is a combination of large blocks of securities or bonds with other types of assets, such as cash and real estate.

8. Venture capital

Venture capital is a form of early-stage equity financing that uses professional investors' money to finance growing companies or ventures. Investment funds that focus on venture capital are often called venture capital funds or firms. They typically provide seed funding and early-stage growth funding for new businesses.

As a result of the challenges and opportunities presented by alternative investments, and the potential for adding diversification to any portfolio, alternatives come with certain risks. Alternative investments are generally long-term and require investors to hold them for an extended period. Compared to traditional investments, such as stocks, bonds, and cash, alternative investments are more illiquid, meaning buyers cannot always sell their holdings when they want or at a chosen price. Finance theory suggests that illiquid investments are overvalued because buyers must pay a premium for accepting illiquidity.

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