LOS A Requires us to:
compare alternative investments with traditional investments
1. Traditional investments mean putting the money in or holding long positions commonly used well-known assets such as stocks, bonds, cash, commodities, real estate, etc.
2. The alternative investments, on the other hand, include all the other, i.e. non-traditional investments.
3. The alternative investments are different from the traditional investments in terms of:
a. Types of assets/securities held,
b. The structure of investment vehicles in which these assets are held, as these investments make use of derivatives and leverages, short positions, illiquid investments, etc. They may also make use of traditional investments as well.
3. The alternative investments usually have the following important features:
a. These investments generally require active management, as these are somewhat specialized investment vehicles.
b. Due to the requirement of active management, the alternative investments do require a higher fee and narrow manager specialization.
c. The alternative investments require a higher amount of investment than the traditional investment options, thus there is a lower degree of diversification.
d. There are generally restrictions on the redemption of these investment instruments.
e. These investments usually have a low correlation with traditional investments.
f. These investments are usually characterized by a low level of regulation and transparency.
g. These investments have unique legal as well as tax considerations.
h. They have limited risk-return data; the investment decisions are made using the estimates.
i. The typical investors who invest in alternative investments are the high net worth investors or institutional investors.