Alternative Investments Flashcards
What are alternative investments?
Financial assets which aren’t traditional securities and they differ as they have less regulation, more transparency and lower liquidity
Give examples of alternative investments?
Crypto, pooled investments
List problems/risks of alternative investments?
Liquidity
Valuation
Trends & Fashion
Lack of income
Regulation
Why is liquidity an issue with alternative investments?
They are difficult to sell quickly at a fair price and the rarer the asset to more limited the amount of buyers there will be. This often results in lower prices in order for owner to get rid of them
Why is valuation as issue with alternative investments?
They are hard to fairly value due to their uniqueness and if there are no recent sales of the same asset then valuation is hard and not consistent.
Why do trends and fashion affect the prices of alternative investments?
Changes in trends mean things become more popular, which will drive prices up. e.g. bitcoin
Why is lack of income an issue for alternative investments?
Most of them don’t provide regular dividends, so it is not worth it for investors seeking dividends or interest
Why is regulation an issue for alternative investments?
There is not too much protection for investors compared to regulated assets like mutual funds
List some types of alternative investments?
Private equity & venture capital
Hedge funds
Commodities
Real Estate
Crypto
What is private equity?
Investing in private companies who are in need of more capital. It includes investors and high-net-worth individuals.
What is venture capital?
High risk investments into startup companies. Investment lead to taking equity stakes in the company as limited partners
What are hedge funds?
Privately managed investment funds which use various strategies to maximise their returns. they accept investments from accredited investors with min level income
Two strategies that hedge funds use and what they are
Directional - Bet on market movements and that one sector will out perform another.
Non - directional - exploit market inefficiencies and buy undervalued stocks and short overvalued
What are commodities?
They are physical assets which come in the form of consumable or transformable whose prices are determined by supply and demand. They are globally traded most frequently in terms of dollars
Why do people invest in commodities?
They are protected against inflation, diversification, crisis resilient, highly liquid
What is real estate?
Tangible assets like buildings, land, machinery.
How is income generated in real estate?
Income is generated from rental payments, property appreciation, Real Estate Investment Trusts (REITs)
What are the investment methods for real estate?
Direct ownership - buying property
Leveraged ownership - mortgages
Mortage-backed securities - bonds backed by real estate loans
REITs - companies that own or finance real estate projects
What are the risks of real estate?
Illiquid
Management costs
Regulatory risks
Market cycles
What are cryptocurrencies?
Decentralised digital currencies based on blockchain technology
What are the issues with crypto?
No central authority - no controlled by gov or banks
Highly volatile - Price influenced by speculation and market demand
