Alternative Investments

Résumé

Alternative Investments are asset classes outside traditional long-only stocks, bonds, and cash, valued for diversification, return potential, and lower correlation with public markets. The main categories are private capital (private equity and private debt), real estate, infrastructure, natural resources including commodities and timberland, and hedge funds. Private equity strategies include leveraged buyouts, venture capital, and growth equity, typically accessed through closed-end funds with capital commitments, drawdowns, and a fund life of several years. Hedge funds pursue strategies such as equity long-short, event-driven, relative value, and macro, often using leverage, short selling, and derivatives. Real estate spans direct ownership and indirect vehicles such as REITs, with returns from income and appreciation. Commodities provide inflation sensitivity, with futures returns decomposed into spot, roll, and collateral components. Methods of investing include direct investment, co-investment, and fund investment, each with different control, fees, and liquidity. Fee structures commonly feature a management fee on committed or invested capital plus a performance or incentive fee on profits, often subject to a hurdle rate and a high-water mark that protects investors from paying twice for the same gains. Because many alternatives are illiquid, infrequently priced, and use appraisal-based valuations, reported returns can understate true volatility and correlation. Investors must conduct thorough due diligence on managers, valuation practices, leverage, and lock-up and redemption terms before committing capital to these less transparent and less regulated markets.