Question

Discuss in details Alternative Investment - Overview, Features and Classification

Answer 1

An alternative investment is an investment in assets excluding the stocks, bonds and cash. The alternative investment offers diversification and the potential for active management. These investments require management expertise to earn profit . There are six basic groups. Traditional alternative investment includes real estate, private equity and commodities. The modern alternative investments are hedge funds, managed futures and distressed securities.

Alternative investments are unique and share some common features. The features are as follows:-

a) Low liquidity:- These assets provide low liquidity as compared to traditional assets. The low liquidity is due to low demand for assets and the absence of centralized market.In addition, Some of the investment come with restriction while exiting it.

b) Diversification:- These investment have low correlation with traditional assets , which provides diversification benefits to investors.

C) Due diligence cost :- The alternative investments have high purchasing cost due to the high management fees attached to it for using expertised skills.

D) Performance Evaluation:- These investment don't have benchmarks to compare with, so it becomes difficult to evaluate the performance.