Alternative investment is an important branch of investment, including hedge funds, private capital, real estate, natural resources, infrastructure and other forms. Understanding alternative investment resources can help investors better grasp investment opportunities and risks. This article will focus on alternative investment categories, characteristics, performance evaluation methods, fee structures and other key information, providing an informative reference for alternative investment practitioners. Proper allocation to alternative investments can help diversify risks and improve portfolio returns.
Hedge funds features and strategies
Hedge funds are aggressively leveraged funds that target absolute returns. They employ equity hedge strategies like long/short, event-driven strategies like merger arbitrage, relative value strategies like fixed income arbitrage, macro strategies and commodity trading advisor (CTA) strategies. Hedge funds have issues like survivorship bias and backfill bias that can overestimate historical performance.
Private capital major types
Private capital includes private equity (eg. leveraged buyouts, venture capital), private debt (eg. direct lending, mezzanine debt) and other non-public forms. It differs from public investments in being less regulated, having lower liquidity but also less public information. Typical PE strategies include leveraged buyouts targeting mature companies with strong cashflows and venture capital targeting startups.
Real estate and infrastructure properties
Real estate investments include residential/commercial property and REITs. Infrastructure comprises long-lived assets like roads, power grids, water systems etc. Both asset classes have inflation hedging ability, relatively stable cash flows, and role for public-private partnerships. But infrastructure tends to have higher barriers to entry and more monopoly characteristics.
Natural resource assets
Natural resource investments provide exposure to commodities like agricultural products, metals, energy, and raw land assets like farmland and timberland. Commodity prices follow supply-demand dynamics and can hedge inflation. Land assets have inherent value and benefit from biological growth.
Alternative investment performance evaluation
Because alternative investments have non-normal returns, conventional metrics like Sharpe ratio can be misleading. Better methods include downside risk ratios like Sortino, drawdown ratios like Calmar, value at risk (VaR) and tail risk measures. Fee structures also differ, with typical management fees based on assets and performance fees above hurdle rates.
In summary, understanding the diverse alternative investment landscape in terms of major categories, return drivers, and risk-return characteristics is key for asset allocators. Utilizing appropriate performance metrics and being aware of fee structures can further aid investment analysis and manager selection.