Lesson 1 of 6 · 12 min
What makes an investment alternative
Alternatives are everything outside public shares, bonds and cash; investors buy them for diversification and higher expected returns, and pay for that with illiquidity, long horizons, big tickets, specialist skills and more complex structures and fees.
In short
- Alternative investments = anything other than owning the traditional asset classes: public equity, fixed income and cash.
- They are grouped by what they are not, so the members can look very different from each other.
- Why investors buy them: greater diversification (often low correlation with traditional assets) and/or higher expected returns.
- What investors accept: illiquidity, long time horizons, large capital outlays, less efficient markets and a need for specialised knowledge.
- These features lead to special investment structures, incentive-based fees and performance appraisal challenges.
- The three categories: private capital, real assets and hedge funds.
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