Course Content
Alternative Investments Vs. Traditional Investments
This topic is covered under LOS A of Reading 58
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LOS A
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LOS A
Categories of Alternative Investments
This topic is covered under LOS B of Reading 58
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LOS B
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LOS B
Benefits of Alternative Investments
This topic is covered under LOS C of reading 58, which requires you to 'describe potential benefits of alternative investments in the context of portfolio management'.
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LOS C
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LOS C
Hedge Funds, Private Equity, Real Estate, Commodities, Infrastructure, and Other Investment – Explained
This topic is covered under LOS D and E of Reading 50, which requires us to: a. describe hedge funds, private equity, real estate, commodities, infrastructure, and other alternative investments, including, as applicable, strategies, subcategories, potential benefits and risks, fee structures, and due diligence; b. describe, calculate, and interpret management and incentive fees and net-of-fees returns to hedge funds; and c. describe issues in valuing and calculating returns on hedge funds, private equity, real estate, commodities, and infrastructure.
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Hedge Funds
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Private Equity
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Real Estate
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Commodities
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Infrastructure
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Others
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LOS D and E
Risk Management
This topic is covered under LOS G of Treading 58, which requires us to 'describe risk management of alternative investments'.
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LOS F
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LOS F
Alternative Investments – Question Bank
Some questions to test your level of preparation for the exam.
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Question Bank
Alternative Investments
About Lesson

LOS F requires us to:

describe risk management of alternative investments

1.  There are certain issues with the investment in alternative investments. Some of them are:

    a.  Long lockup periods,

    b.  Lack of transparency,

    c.  Illiquidity

    d.  Operational expertise,

    e.  Leverage,

    f.  Lack of market, and

    g.  Use of derivatives.

2.  There are also certain implementation issues involved in such investments. They include:

    a.  Indices are widely used to track the performance of several classes of alternative investments. And risk-return indicators of these indices might not reflect the risk-return characteristics of the actual assets.

    b.  The reported correlation with the traditional investment may vary significantly.

    c.  There may be variability between the managers and the asset class.

    d.  It is difficult to diversify using alternative investments for small investors.

3.  As for the risk-return measures are concerned, use of valuation estimates may result in lower volatility, therefore the use of the Sharpe ratio is inappropriate for measurement of performance.

The measures of downside risk are more useful.

4.  The risk-return estimates can be made using:

    a.  Value-at-risk (VaR)

    b.  Shortfall or Safety-First Approach.
This involves the calculation of the probability that the value of the portfolio will fall below a minimum acceptable value over a given period of time.

    c.  Sortino Ratio.
This ratio uses only downside deviation instead of full standard deviation.

1.  Due Diligence

While considering the risk of investing in alternative investments, the investors must consider the following factors:

1.  The organizational structure,

2.  Portfolio management,

3.  The operations and controls,

4.  Risk Management,

5.  Legal Review, and

6.  Fund’s term.

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