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Alternative Investments
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Alternative investments are asset classes that do not fall into the traditional categories of stocks, bonds, and cash. Common examples include real estate, private equity, hedge funds, commodities, etc.
Real estate investing involves purchasing and managing properties like residential homes, commercial buildings, land, etc. with the goal of generating rental income or profiting from price appreciation.
Private equity refers to investment funds that acquire stakes in private companies or take public companies private with the aim of improving their operations and later selling them for a profit.
Hedge funds are actively managed investment funds that pool money from investors and employ a wide variety of complex trading strategies to generate positive returns in any market environment.
Commodities are basic goods like agricultural products, energy products, metals, etc. that are interchangeable and traded on exchanges. Investors buy and sell commodity futures contracts to speculate or hedge.
Alternative investments tend to have low correlation with traditional asset classes like stocks and bonds, offering portfolio diversification benefits and potential for higher risk-adjusted returns.
Key risks include illiquidity, higher fees, complex structures, lack of regulation/transparency, and high minimum investment requirements compared to public market securities.
The J-Curve refers to the cycle of negative returns in the early years of a private equity fund due to upfront fees and costs before exiting investments profitably in later years.
Hedge funds typically charge both a management fee (around 2% of assets) as well as a performance fee (around 20% of profits generated for investors).
Common strategies include long/short equity, global macro, event-driven, relative value arbitrage, distressed securities, and more.