Alternative Investments : A Primer

1. Alternative Investments : A Primer By A.V. Vedpuriswar (Based on the CFA Institute curriculum and study material)

2. Introduction Alternative assets refer to alternative asset classes (assets other then plain vanilla equities and bonds) and alternative investment (more sophisticated, leveraged) strategies. Mutual funds, hedge funds, venture capital, distressed securities, closely held companies, real estate, commodities, art, etc are good examples. These investments often involve less liquidity, longer time horizons and difficulties in establishing fair valuation.

12. Some indexes are based on appraised values for the real estate. The use of appraised values tends to smooth the returns of appraisal-based indexes relative to market prices. In portfolio optimization models, appraisal-based indexes will tend to have very large weight because of their low volatility and low correlation with important asset-class proxies such as the S&P 500 stock index. Many analysts consider this a very serious drawback of appraisal-based indexes . Other real estate indexes are based on the performance of the shares of Real Estate Investment Trusts (REITs).

14. Hedonic approach A more detailed method of the sales comparison approach is hedonic price estimation, where specific characteristics of property are quantified . This involves creating a statistical model of the sales prices of properties, showing how the prices are related to certain key characteristics that influence the value of a property. The model produces an estimate of how much each of these factors contributes to the value of a property on average.

15. The Income method The income method uses a discounted cash flow model to estimate the present value of the stream of annual net operating income using the required rate of return for the property.

16. Venture Capital Venture capital investments are private, non-exchange-traded equity investments in a business venture. Investments are usually made through limited partnerships. Investors expect relatively high returns in exchange for the illiquidity and high risk profile of a venture capital investment.

23. Event-driven funds strive to capitalize on some unique opportunity in the market. This may involve investing in a distressed company or in a potential merger and acquisition situation. Funds of funds investing involves creating a fund open to both individuals and institutional investors, which in turn invests in hedge funds.