Alternative Investments

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Contents

Introduction to Alternative Investments

Alternative Investment Classes

Roles in Portfolio Management

Risks of Alternative Investments

Conclusion

Introduction to Alternative Investments

Definition of an alternative Investments is significant. Alternative investment is a big field which agreement has not came out. This is also a changing field which probably remain indefinable always. When analysis of all the various definitions of alternative investment will be over, the result of the analysis will be a useful starting point of understanding alternative investments.

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Alternative investments are sometime shows as an investment which has a long position in traditional investments. Naturally, traditional investments are such investments which has equities, fixed incomes and most importantly cash. As like, if a particular investment like private equity, is not covered in the books of investment as equity. So, many people can treat this investment as an alternative investment. (Editor’s Letter, 2012)

The alternative investments definition is very deep for the CAIA curriculum. The word investment has a very broad range. A fine description of alternative investment is that it is a delayed consumption. Any expense of cash which has a possibility of receiving future benefit might be considered as an investment. So, from this theory an investment ranges from planning a tree to investing in stock, so that an accurate definition of alternative investment needs more particularity. (Inderst, Kaminker and Stewart, 2012)

Alternative Investment Classes

Because of CAIA curriculum on investment quality investments, some of the listed below investments are traditional investments instead of alternative investment. (Highlights From alternative investment news, 2009)

Expected alternative investments generally available on capital and other markets:

  • Real Assets
    • Real estate
    • Real estate investment trusts
    • Land
    • Infrastructure
  • Hedge Funds
  • Commodities
  • Private Equity
    • Mezzanine debt
    • Distressed debt
  • Structured Products
    • Credit derivatives

Real Assets

The real assets which focused on investments are the underlying assets. These assets are involved strait to the ownership of non-financial assets more accurately than the financial assets such as securities, manufacturing or service enterprises. Real assets are likely signifying more direct claims on consumption than common stocks. And this asset, like, intangible assets and managerial skills also has tended to do with less reliance of factors which create values in a company. A company like Google has a grip on real estate and also in other real assets. The valuation of assets of Google is highly reliant on perceptions of the ability of firm for making and selling their assets and services. (Campello and Giambona, 2012)

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Real estate – Determined on lands and their improvements which are attached eternally like buildings etc. Real estate is a significant asset class before the stocks and bonds which are became important. In the industrial age, land is the most valuable asset class. Real estate was the most valuable asset for most of the investors only a few decades ago because most of the individual investor’s ownership of primary residence was more common than ownership of financial investments.

Timberland – Timberland is the combination of lands and timber of forests which are utilized in the industry products. At the same time as the original land is clearly real estate, the timber on the land is regarded from the list of real estate’s since this is not affixed to the land. Therefore timberland is in the list of real assets but, this is not included as a real estate subject refers to the CAIA curriculum. Which are not listed in the list are other real assets such like land and farmlands etc.

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Infrastructure investments – These investments are declare as the calculation of the incomes come from toll roads, regulated utilities, ports, airports, and other real assets which are controlled by the public sectors. Investable infrastructure prospect contains the privatization of existing infrastructure or by the formation of new infrastructure which created privately.

At last some descriptions of real assets limit category to tangible assets, it is clear that the intangible assets also will be including in the real assets. As such intellectual property, patents, copyrights, trademarks, individually created music or film and royalty publishes. Financial asset is not an intangible asset because it is an opposite of real asset nature. Intangible assets such like copyright on a private property can be claimed on the future. Similar examples are like a sport stadiums for generate entertainment. Therefore, intangible assets can be representing as a big and rapidly increasing role of the wealth of society.

Hedge Funds

Hedge funds correspond to the most able to be seen the category of alternative investments. Hedge funds are related with the particular fee structure of the risk level. It is defined that the hedge fund is a private organized investment vehicle which uses its general regulated nature of opportunities. These are distinct from the opportunities which are offered by the traditional investment vehicles. This is a subject to those regulations who are restricting their uses of leverage and derivatives. Hedge fund symbolizes a wide range of set of vehicles which are differentiated mainly.

Commodities

Commodities are the products which is available in large quantities. Such like energy products, agricultural products, and building materials etc. Most of the investment which are covered in the commodities section under the CAIA curriculum involved in future contracts. Future contracts are regulated distinctly and have well defined economical properties. As example the analysis of future contracts highlights the notional amounts rather than the money posted as secure or margin to obtain positions.

A commodity as an investment class refers to those investment products which has a passive exposure to commodity prices. This exposure could be obtained in the future from the contracts, physical commodities, natural resource companies and exchange traded funds.

Private Equity

Private equity is used in the CAIA curriculum for including the equity and debt positions amongst the all other things. In most of the cases the debt positions which contain so much risk from the cash flow uncertainty because of their short term return actions is as same as the equity positions. In other words the value of debt positions of a high levered company behaves much likely to the equity positions in the same firm. (Ianni, 2012)

A private equity investment collaborates from the funds from the venture capital. (Derakhshani, 2014)

Venture Capital – which is refers to the equity financing for the start-up companies who do not have sufficient size, track record or desire to focus on coming capitals from traditional sources like public capital market or lending instructions etc. Venture capitals are some kind of fund which has high risk, illiquidity and not proven ideas. (Tarrade, 2012)

Leveraged buyouts – are those transactions which purchased from a small amount of investor capital and a large amount of on loans. The loan amounts are secured by the assets of cash flows or the company. (Ang, Hutton and Majadillas, 2013)

Mezzanine debts – derives from the position of the capital structure of a firm stuck between the upper limit of senior secured debt and the equity floor. This debts are refers to the spectrum of risky claims including the preferred stock, convertible debts. (Brittenham and Ryan, 2012)

Distressed debts – are the debts which filed for the protection against bankruptcy in the future. Though the securities are fixed apart from that the debts which is included in the discussion of private equity are the future cash flows of the securities. These debts are highly risky and dependent on the financial success of the company. (Singh, 2003)

Structured Products

Structured products is like an instrument which has created to show the particular return, risk, tax-actions or the attributes. This instrument generates unique cash flows which are the result of personate cash flow of a traditional investment. A simple example of structured product is a creation of debts securities in a traditional corporation. The cash flows and the risk of corporation assets structured into a fix low risk stream of cash flow. Construction of a financial corporation source will create an option like characteristics for the resulting securities. When the process creates instruments which have not behaviour like traditional investments are not considered to be a traditional investments according to the instructions. (Hintzke and Brown, 2011)

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Credit Derivatives – are another type of popular structured product which are negotiated individually. Credit derivative facilities are the transfer of credit risks. Credit derivatives are allowed to a credit protection buyer for transfer some of credit risk associated to a specific coverage to the party. In other words credit derivatives are like credit protection seller. The credit protection sellers might be expanding into the credit risk. This can also speculate on the given credit risks. (Choudhry, 2010)

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Roles in Portfolio Management

Alternative investments utilizations are a different approach to investment in equity or fixed income investments. The approach can be involved in holding both the long positions and short positions securities instead of public investments. Investors who are using alternative investments have goal of achieving a particular level of absolute return of relative performance versus an index.

Portfolio management of alternative investment requires the application of techniques which is designed to address issues. In traditional investment the ability to transact at low cost allows the uses or short term horizons. The portfolio manager can adjust quickly adjust positions as change of conditions. The inability to trade some alternative investment like private equity at low cost adds complexity to the portfolio management process such as liquidity management, alternative investment etc. (Topalian, 2012)

Private Equity is an investment strategy which participates in the growth of private companies through long term investments globally. This is generally available to the high net growth individuals with high minimums. Hedge Funds a managed portfolio of investment uses advanced investments strategies like leverage, long and short derivative positions both in the domestic and international markets. Managed Future is an investment strategy which seeks to participate in trends in a large variety of global future markets. Strategy include of this are stock index, interest rate, currency, energy etc. Alternative mutual funds are a traditional portfolio method. Many firms have a total return of objectives which provided to non traditional investments. A structured product creates an option like characteristics for the resulting securities into the portfolio management. Credit derivatives are allowed to a credit protection buyer for transfer some of credit risk associated to a specific coverage to the party which helps in portfolio management. A commodity exposure could be obtained in the future from the contracts, physical commodities, natural resource companies and exchange traded funds and can help in portfolio management. (Zaker, 2007)

Risks of Alternative Investments

There are many risks associated in the alternative investments:

  • Alternative investments can have higher fees.
  • Alternative investments can be invested in variety of ways which can be complicated.
  • There can be limited transparency into the holdings of these investments.
  • Limited partners can hold illiquid investments like redeemable money of an investor.
  • Most alternative investment strategies are not friendly with taxes.
  • Alternative investment can discourage many investors due to the often uses of short selling strategies.
  • Alternative investments may not expand risks in extreme down markets. (Chambers, Kelly and Lu, 2014)

Conclusion

Appropriate uses of alternative investments can potentially enhance the overall risk return of an investment portfolio. There is a unique benefit of alternative investments. It is vital for the investors to choose comfortably within the investment strategies. These investments are non-traditional. Traditionally people believe that investing in higher risk will lead them to higher profits over time. But according to the last persistency investors with conventional portfolios were not necessary for more profits. (Chambers, Kelly and Lu, 2014)

References

Ang, J., Hutton, I. and Majadillas, M. (2013). Manager Divestment in Leveraged Buyouts. European Financial Management, 20(3), pp.462-493.

Brittenham, D. and Ryan, P. (2012). Leveraged financing, 2012. New York, NY: Practising Law Institute.

Campello, M. and Giambona, E. (2012). Real assets and capital structure. Cambridge, Mass.: National Bureau of Economic Research.

Chambers, D., Kelly, M. and Lu, Q. (2014). Understanding the Estimation Risks of Value at Risk. Alternative Investments, 16(3), pp.64-85.

Chambers, D., Kelly, M. and Lu, Q. (2014). Understanding the Estimation Risks of Value at Risk. Alternative Investments, 16(3), pp.64-85.

Choudhry, M. (2010). Structured credit products. Hoboken, NJ: Wiley.

Derakhshani, S. (2014). Branding Equity Capital. Private Equity, 17(4), pp.9-19.

Editor’s Letter. (2012). Alternative Investments, 14(3), pp.1-2.

Highlights From alternative investment news. (2009). Alternative Investments, 12(1), pp.93-98.

Hintzke, D. and Brown, C. (2011). FATCA’s Impact on Structured Products. Structured Finance, 17(2), pp.17-22.

Ianni, E. (2012). Land Acquisitions and Rural Poverty: Unveiling Ambiguities in the District of Caia (Mozambique). Environment and Natural Resources Research, 2(3).

Inderst, G., Kaminker, C. and Stewart, F. (2012). Defining and Measuring Green Investments. Paris: OECD Publishing.

Singh, M. (2003). Recovery rates from distressed debt. Washington, D.C.: International Monetary Fund, International Capital Markets Dept.

Tarrade, H. (2012). Cross-border venture capital investments. Wiesbaden: Springer Gabler.

Topalian, A. (2012). Frontline Roles for Design Leaders in the Multiverses of Business. Design Management Journal, 7(1), pp.29-39.

Zaker, S. (2007). Alternative Metrics. Alternative Investments, 9(4), pp.79-92.

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