Alternative Investments

Alternative Investments represent a diverse asset class beyond traditional stocks, bonds, and cash. For CFA Level 3 candidates, understanding these investments becomes critical for portfolio construction and wealth management. Key alternative investment categories include: 1. Private Equity: Investments in non-public companies, including venture capital, leveraged buyouts, and growth equity. Returns typically follow a J-curve pattern with negative cash flows initially before potential higher returns later. 2. Hedge Funds: These utilize various strategies such as long/short equity, global macro, or event-driven approaches. Fee structures commonly follow the "2 and 20" model (2% management fee plus 20% performance fee). 3. Real Estate: Both private and public (REITs) real estate investments offer potential income and appreciation. Analysis involves cap rates, NOI, and various valuation methods. 4. Commodities: Investments in physical goods like energy, metals, and agricultural products. These often provide inflation hedging and portfolio diversification benefits. 5. Infrastructure: Long-term investments in essential facilities like transportation, utilities, and communications networks, offering stable cash flows and inflation protection. Alternative investments generally feature: - Lower liquidity compared to traditional investments - Less regulatory oversight and transparency - Higher minimum investments and fees - Complex valuation methodologies - Unique risk-return profiles Portfolio allocation considerations include: - Correlation benefits with traditional assets - Higher due diligence requirements - Specialized manager selection processes - Return enhancement and/or risk reduction potential - Time horizon matching with illiquidity periods For CFA Level 3, understanding how these investments fit within asset allocation frameworks, their role in institutional portfolios, and appropriate manager selection methodologies is essential for constructing optimized portfolios across various client types.

Alternative Investments represent a diverse asset class beyond traditional stocks, bonds, and cash. For CFA Level 3 candidates, understanding these investments becomes critical for portfolio construc…

Concepts covered: Hedge Fund Strategies, Asset Allocation to Alternative Investments