Question

The use of alternative investments is very common in the professional institutional market.

What are the benefits of using alternative investments in a long term portfolio?

What are the main differences in investing in Hedge Funds vs traditional mutual funds?

What are the pros and cons in investment in Private Equity Funds, as comparing to Equity Mutual funds?

Answer 1

benefits of using alternative investment in long term portfolio

alternative investment is a financial asset which does not fall into one of the conventional equity/income/cash categories.

since alternatives behave differentrly from one another compared to a single stock or bond iinvestment, having alternative investment in a portfolio brings diversification and increases returns. alternative invetsments have low correlation, that is how they diversify risk and return.

invetsing in hedge funds and investing in traditional mutual funds

1. availability: mutual funds are available for daily trading and offered to public (retail investors)

hedge funds are only available to accredited investors

2. objective: mutual funds offer return in excess of the risk free return offreed by market

hedge funds offers maximum possible returns from the investment

3.invetsment: mutual funds invetsment requirement is limited

however for hedge funds, high invetment with high risk appetite is required

4. manager: mutual fund manager does not hold a substantial interest in the fund's performance

hedge fund manager have a mandate to hold a large share in the respective fund to generate a level playing field on the oart of manager

5. regulation: mutual funds are regulated by securities exchange board of that respective country.

hedge funds are not tightly regulated by any board

pros and cons of invetsment in private equity funds and equity mutual funds

private equity investment

pros

cons

professional sourcing business prospects	non liquid, funds locked up in for a long time.
possibility of higher profits	the variablities of result is very high, total losses or total gain kind of situation
tax advantages	high risk

equity mutual funds

pros	cons
1. diversification: mutual funds offer a basket of funds to invest in 2. investment and access to multiple asset classes, be it small cap or mid cap funds. 3.factor exposure: investors can access mutual funds focussing on specific investment factor like growth, low volatility and value.	1. mutual funds carry a higher expense ratio than passive index funds. 2. lack of intraday liquidity 3. tax inefficiancy