Alternative Investments – Structures and

Outlook 2021

By: F.A. Emlyn Ngwiri

Table of Contents

1.What is an Alternative investment?

2. Traditional vs. Alternative Investments
3.Categories of Alternative Investments
4.Alternative Investment Structures
5.Risk & Return characteristics of Alternative versus Traditional Investments
6.Goals of Alternative Investing
1.What is an Alternative investment?

• Definition: According to the Chartered Alternative Investments Analysts (CAIA)

Institute, Alternative investments are sometimes viewed as including any
investment that is not simply a long position in traditional investments.

• Alternative Investments by Exclusion

Investments that do not have long positions in traditional assets are often
categorized as Alternative Investments. Typically, traditional investments include
stocks traded publicly, fixed-income and cash

• Alternative Investments by Inclusion

Another approach for finding alternative investments is to specify which
investments are deemed alternative; Real Assets, Private Equity, Structured
Products, Hedge Funds and Commodities
2. Traditional vs. Alternative Investments

TRADITIONAL PORTFOLIO MODEL ALTERNATIVE ALLOCATION MODEL

Stocks Bonds Cash Stocks Bonds Cash Alternative Investments

3. Categories of Alternative Investments

1. Real Assets

These are investments in which the underlying assets involve direct ownership of non
financial assets rather than ownership through financial assets, such as the securities of
manufacturing or service enterprises companies. Real assets include;

1.Raw land and real estate,

2. Infrastructure (social and economic),

3.Timber and timberland,

4.Farmland and

5.Intellectual property
3. Categories of Alternative Investments Contd…

2. Hedge Funds
are a privately organized investment vehicle that uses its less regulated nature to
generate investment opportunities that are substantially distinct from those offered by
traditional investment vehicles, which are subject to regulations such as those restricting
their use of derivatives and leverage. Classification of hedge funds include;
1. Futures funds : Macro and managed
2. Event driven : Merger arbitrage, Distressed, Event driven multi strategy
3. Relative value: Convertible, Fixed income
4. Funds of funds: Hedge fund manager chooses and invests in underlying hedge
funds
3. Categories of Alternative Investments Contd…

3. Private Equity

They include both equity and debt positions that, among other things, are not publicly
traded. Private equity investments emerge primarily from funding new ventures, known
as venture capital; from the equity of leveraged buyouts of existing businesses; from
mezzanine financing of leverage buyouts or other

ventures; and from distressed debt resulting from

the decline in the health of previously healthy

firms.
3. Categories of Alternative Investments Contd…

4. Structured Products
Students
These are instruments created to exhibit
Principal + Interest Makes a loan
particular return, risk, taxation, or other
attributes. These instruments generate Originator
unique cash flows as a result of partitioning
“sale of loans” Cash proceeds
the cash flows from a traditional investment Fees

or linking the returns of the structured SPV Credit Enhancer

Rated loans
product to one or more market values. The Issuance of rated loans Cash proceeds

process of securitization comes to mind

Investors
3. Categories of Alternative Investments Contd…

5. Commodities

Refer to investment products with somewhat passive (i.e., buy-and-hold) exposure to

commodity prices. This exposure can be obtained through futures contracts, physical
commodities, natural resource companies, and exchange-traded funds. Grain, gold, meat,
oil, and natural gas are examples of commodities. They can take the form of:

1. Ownership of the physical commodity

2. Forward or futures contracts

3. Securities of commodity producing firms

4. Exchange traded funds

4. Alternative Investment Structures

Regulatory Structures
Government regulation and
Source of Investment taxation.
Structures Investment Claims
Returns
Securities Structures
Cashflow securitization that
creates tradable units.
Traditional
Investments Trading Structures
Regulatory Development and execution of
Underlying Trading trading strategies.
Investors
Real Asset Securities
Compensation Structures
Cash Flows Compensation Organization and compensation
Institutional arrangements which determine
Alternative fees.
Investments
Institutional Structures
Financial institutions and markets
5. Risk & Return characteristics of Alternative
versus Traditional Investments
Characteristic
Return Computation Methodology
Statistical Methodology
Valuation Methodology
Portfolio Management
Traditional Investments Alternative Investments
Prices, Interest and dividends are observable Return computations must accommodate
and straight forward. underlying structures and IRR would be useful
because it calculates return based on size and
timing.
Investments are normally distributed and are As a result of institutional (thin trading), trading
analyzed using mean and standard deviation. (dynamic risk exposures) and securities
(tranching) structures, investments are not
normally distributed and analysis would require
the use of statistical methods designed to
accommodate non normal returns e.g. down
side risk measures such as downside deviation
Involves fundamental and technical analysis Valuation methodologies must account for
nontraditional attributes including Short term
active trading, unique cashflow structure
making forecasting difficult.
Assumes markets are liquid with low Are subject to illiquidity, inefficient pricing and
transaction costs. Mean and variance are the non normal returns and higher moments of
only inputs for optimization distribution – kurtosis and skewness would
appropriate
6. Goals of Alternative Investing

• Active Management - Active management refers to efforts of buying and selling securities in pursuit of
superior combinations of risk and return

• Generating Absolute Returns - An absolute return standard means that returns are to be evaluated
relative to zero, a fixed rate, or relative to the riskless rate, and therefore independently of performance
in equity markets, debt markets, or any other markets.

• Arbitrage, Return Enhancement and Diversification – Arbitrage represents efforts to earn superior
returns even when risk is not eliminated because the long and short positions are not in identical assets
or are not held over the same time intervals. If the primary objective of including an investment product
in a portfolio is the superior average returns that it is believed to offer, then that product is often
referred to as a return enhancer. If the primary objective of including the product is the reduction in the
portfolio’s risk that it is believed to offer through its lack of correlation with the portfolio’s other assets,
then that product is often referred to as a return diversier.
End of presentation 1

Thank you