Week 9:

ALTERNATIVE
INVESTMENT
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 1.z OVERVIEW OF ALTERNATIVE INSTANT
( Real state. Commodity, hedge funds.)

Alternative investment include such as real

estate and commodities, which are arguably
two of the oldest types of investment.

Alternative also include non-traditional

approaches to investing within special
vehicles, such as private equity funds and
hedge funds.
7 Types of alternative investments
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1. PRIVATE EQUITY

Private Equity is a broad Category that

refers to capital investment mades into
private companies, or those not listed on a
public exchange, such as the new York
Stock exchange.
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2.PRIVATE DEBT

Private debt refers to investment that are not

financed by banks (i.e.,a bank loan) or traded
on an open market. The “private” part of the
term is important – it refers to the investment
instruments itself rather than the borrower of
the debt, as both public and private
companies can borrow via private debt.
3.HEDGE
z FUNDS

Hedge funds are investment funds that trade

relatively liquid assets and employ various
Hedge funds are investment funds that trade relatively liquid
investing strategies with the goal of earning a high
assets and employ various investing strategies with the goal
return on their investment. Hedge fund managers
canofspecialize
earning a high return on their investment. Hedge fund
in a variety of skills to execute their
managers cansuch
strategies, specialize in a variety ofequity,
as long-short skills tomarket
execute their
strategies, volatility
neutral, such as long-short equity,
arbitrage, market
and neutral, volatility
quantitative
arbitrage, and quantitative strategies.
strategies.
4. REAL
z
STATE

There are many types of real assets. For example,

land, timberland, and farmland are all real assets,
as is intellectual property like artwork. But real
estate is the most common type and the
world’s biggest asset class.
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5.COMMODITIES

Commodities are also real assets and mostly

natural resources, such as agricultural
products,
 Commoditiesoil, natural
are also gas,
real assets andnatural
and mostly precious
resources,and
such as
agricultural
industrial products, oil,
metals. natural gas, and precious
Commodities are and industrial
considered
ametals.
hedge Commodities are considered a hedge against inflation, as
against inflation, as they’re not
they're not sensitive to public equity markets. Additionally, the value
sensitive to public equity markets.
of commodities rises and falls with supply and demand—higher
Additionally, the value
demand for commodities ofhigher
results in commodities rises
prices and, therefore,
and falls
investor with supply and demand—higher
profit.
demand for commodities results in higher
prices and, therefore, investor profit.
 z 6.COLLECTIBLES

Collectibles include a wide range of items such as:

• Collectibles include a wide range of items such as:
•
Rare wines • Rare wines
Vintage cars • Vintage cars
Fine art • Fine art
• Mint-condition toys
Mint-condition toys
• Stamps
Stamps • Coins
Coins • Baseball cards
Baseball cards
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Investing in collectibles means purchasing and

maintaining physical items with the hope the value
of the assets will appreciate over time.
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7.STRUCTURED PRODUCTS

Structured products usually involve fixed income

markets—those that pay investors dividend payments
like government or corporate bonds—and derivatives,
or securities whose value comes from an underlying
asset or group of assets like stocks, bonds, or market
indices. Examples of structured products include credit
default swaps (CDS) and collateralized debt obligations
(CDO).
z 2. Evaluating risk and return
alternative investment
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The risk and return analysis aim to help investors

find the best investments. Hence, investors use
many methods to analyze and evaluate the market,
industry, and company. Diversification of the
portfolio, i.e., choosing an optimal mix of different
investment options, can reduce the risk and
amplify returns.
z

Financial risk and return in investing

are perhaps the most crucial
parameters considered by investors
while choosing an investment
option. Individuals who invest on a
large scale analyze the risks
involved in a particular investment
and the returns it can yield. Let’s
take a step-by-step approach to
understand the concept.
 z GRAPH

The correlation between financial risk and return is fairly simple to

comprehend. The risk in choosing a certain investment is directly
proportional to the returns. Therefore, selecting a high-risk investment can
give higher profits, while a low-risk investment will minimize the returns.

So, plotting a graph between the risk and return on investment will give a
straight line passing through the center.

Relationship between risk and return

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RISK AND RETURN OF A PORTFOLIO

One of the ideal measures to reduce

risk while simultaneously maximizing
revenue is by diversifying the
investment portfolio. Investors can
choose multiple investments that offer
different returns accordingly.
 z TYPES OF RISK
• Market risk – It is also called systematic risk and arise
due to various market related factors like economic
and political problems, interest rate and currency
fluctuations, etc. They have a huge impact on the
investors.

• Specific risks – They are related mostly to company

itself. They may be controlled through diversification
an monitoring.

• Credit risk – This is related to credit worthiness of the

company or business. If the financial condition of the
business is good, it will be able to meet its current
and future obligations and repay its debts on time.
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• Liquidity risk – This is the result of the business not

being able to earn good revenue to meet its financial
obligations and maintain high working capital.

• Interest rate risk – The fluctuations in the interest

rates in an economy can affect the business’s
borrowing capacity.

• Inflation – The inflation leads to erosion of value of

investments and the value of cash flows in future.
z TYPES OF RETURN

• Capital gains – Any good investment will rise in

value as time passes by. Thus the assets will be
valued higher if they are sold later on as compared
to its purchase price, giving capital gain.

• Dividends – they are a steady source of income for

investors who invest in shares of companies giving
regular dividends which are a part of the profits set
aside for investors.

• Interest – Borrowers like individuals or corporates

borrow money for meeting expenses or capital
requirements.
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• Rental income – Any property rented out can earn rent on a

regular basis, which is also a return in the real estate
property.

• Return from currency trading – Profits earned from trading

in exchange rates by using the differences is exchange rate
of different currency is also a form of return for those who
do currency trading.
 z3.RULE OF ALTERNATIVE IN
PORTFOLIO DIVERSIFICATION

This study examines

the portfolio
diversification
benefits of
alternative currency
trading in Bitcoin
and foreign
exchange markets.
 z 7 Golden rules for alternative investment
to help maximise your success
1. Draft a plan and investment strategy

2. Be patient and have a long- term perspective

3. Diversify your portfolio

4. Understand risk – return profile and illiquidity of the

asset class

5. Don’t try to time the market

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.
6. Pay attention to the fund manager selection

7. Use the help of investment adviser

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