What Are Alternative Investment Management? Definition And Examples

Alternative Investments are assets which are not stocks, bonds, or cash. These investments differ from traditional investments because they offer less liquidity. Selling and converting these assets into cash sometimes gets challenging. These investments offer a hedge against inflation, greater alpha, and low correlation with equities and bonds.

According to reports, revenue collection in alternative investments has increased from $3 Trillion dollar in 2003 to $15 trillion in 2019. It is expected to grow and reach $18 trillion by 2024.

Table of Contents

What is an Alternative investment?

Alternative investments are a type of financial asset that is not classified under the conventional investment categories, such as stocks, bonds, equity or cash.

Alternative investments can include art, antiques, property, derivatives contracts, hedge funds, venture capital, private equity, etc. Real estate is classified as one of the most promising alternative investments for investors. Let us know more about Alternative investments and methods in this article.

What is Alternative Investment Management?

Alternative investment management is informed investment in non-convention investment assets such as stocks, equity, bonds, etc. Alternative investment management invests in private equity, hedge funds, private debts, real estate, etc. These assets offer lesser liquidity and various challenges for investors. Hence, the need for proper alternative investment management is crucial.

Buying and selling these alternative investment assets are complex due to their lower exposure to open markets and hence it is often difficult to analyze the value of the asset. Investing in alternate investment options must be thoroughly planned, researched and analyzed to ensure higher returns and manage risk factors.

Alternative Investment Management: Key Takeaways

Alternative investments differ from traditional investment assets such as stocks, bonds, equities, and cash.
They consist of diversification with a range of assets offering higher returns, such as hedge funds, real assets, private debt, private equity, collectibles, etc.
Alternative Investment management is the practice of investing in assets rather than traditional assets such as stocks, bonds, and cash.
Common examples of alternative investment assets are private equity, hedge funds, real property, commodities, tangible assets, hedge funds, etc.

Why Consider Alternative Investments?

Alternative investments are not included in the category of conventional investment techniques. Adding them to the portfolio can help to lower volatility rate, provider diversification and high returns with reduced risk factors.

These investment options are beneficial for new startups and businesses by providing them with the opportunities, capital and regular income opportunities to build strong foundations. Alternative investment options are sometimes harder to reach potential investors because of lower marketing advertisements and platforms.

They also may have higher initial upfront fees but lower transaction fees because of lower turnover as compared to conventional investment options. These assets can have lower liquidity as buying or selling them is difficult due to the limited number of buyers. Also, analyzing these values is difficult due to the limited number of sellers and advertisements. Private equity, hedge funds, real estate, commodities, and tangible assets are examples of alternative investments.

Types of Alternative Investments

Some of the major frequent types of alternative investments are mentioned below.

1. Private Equity

Private equity is an investment done in private companies that are not listed on the public stock exchange or stock market (NSE or BSE). Sometimes investors also acquire these private companies at the quoted price.

These private equity investments offer benefits such as mentorship, effective assistance and industry expertise at a lower price than other conventional investment assets in the market. Venture capital, growth capital, and buyouts are examples of private equity where venture capital focuses more on new startups and early-stage ventures.

2. Real Estate

Real estate is considered one of the most influential alternative investment options for investors. Investors purchase a property, lease it to generate rental income, or give it on a lease. It is also considered as world’s biggest asset class, consisting of farmland, and all real estate.

However, the valuation of real estate can be a challenging task. It is important to implement valuation skills and strategies based on various requirements before investing in a particular real estate.

3. Hedge Funds

Hedge funds are investment strategies using various investment strategies with the aim of earning higher returns on investments. However, in hedge funds, there are limited partnerships with private investors whose money is managed by fund managers who use a wide range of investment strategies, from leverage to alternative assets, to earn a much higher return.

In hedge funds, investors arrange strategies in a way where they could gain when the market goes up and also benefit when the market goes down through effective diversification. Thus, it is also known as a hedge fund.

4. Private Debt

Private debt is an alternative source of money that individuals and businesses borrow via private debt. These investment strategies are preferred when businesses need more capital for their company’s growth or operations. The company that provides the capital are called the private debt fund, and they can take their money back using interest payments or repayment of the initial loan. These debts are not financed by banks or traded in the open market.

5. Commodities

Commodities are real assets used as alternative investments. Some of the products included in commodities are natural gas, oil, gold, and other precious metals. Commodities are not sensitive to public equity markets. However, price fluctuations happen with the rise and fall of supply and demand for commodities. Higher demands can increase prices and lead to investor profits.

6. Collectibles

Collectibles are physical assets whose value is appreciated over time. The collectibles have a wide range, including vintage cards, rare wines, fine art, stamps, coins, etc. These investments incur high costs of acquisition and low liquidity. Managing these assets to maintain their value over time is important.

Benefits of Alternative Investment Management Practice

Alternative investment assets offer a number of benefits, some of which are mentioned below.

Diversification: By including alternative investment assets in their portfolio investors can reduce their overall risk and enhance their return chances.
Hedging against inflation: Some of the asset’s value, such as real estate, and commodities, can provide an effective hedge against inflation. They can derive benefits from rising prices and help investors earn higher returns.
Higher Return Potential: There is a wide range of alternative investment assets that can generate higher returns as compared to traditional investment techniques.
Unique investment opportunities: Alternative investment offers various opportunities for earning higher returns by investing in private companies, real estate projects, infrastructure assets, and commodities. These opportunities are not generally available in the traditional public market.
Steady income opportunities: Some of the assets such as REITs (Real Estate Investment Trusts), infrastructure funds, and private equity can provide steady income generation through rental income, and interest payments.

Major Challenges Faced by Alternative Investment Management

Some of the major challenges faced by alternative investment techniques and their management are mentioned below.

1. Maintaining Pricing Irregularities

Alternative investments face many irregularities as they are not updated at regular intervals due to which determining asset value is difficult, leading to extra investment and pricing irregularities.

2. Liquidity Management

Buying and selling alternative investment assets are difficult compared to traditional investment techniques such as stocks, bonds or others. Managing proper liquidity can be a challenge in alternative investment management.

3. Risk Management

A higher level of risk in alternative investment management is a major concern for investors. Some of the frequent risks, such as market risks, credit risks, and operational risks, can be complex tasks.

4. Less transparency

Alternative investments are often less transparent which makes it challenging for cost evaluation and risk management to align with the asset. Alternative investment managers need to build trust and build more effective communications to help build trust and transparency.

5. Ineffective Valuations

Private equity and real estate valuations are difficult due to a lack of data in the public domain and are often influenced by individuals handling them. At the client’s end, these assets may not always reflect the correct investment value.

Alternative Asset Management: Analysis of Alternative Classes and Performance

Check the table below for the performance of some major types of alternative investment options.

Asset Class	Average % Share	Performance and Opportunities
Private Equity	40%	Robust performance with Internal Rate of Return- 25% Availability of record dry powder (~ USD 1.5 trillion) There is plenty of scope for digital innovations
Hedge Funds	35%	Stable performance over past years. Making use of profitable techniques (such as arbitrage, macro, long/short, etc.) to increase alpha
Real Estate	9%	Investment opportunities in emerging economies. Higher risk strategies amid growing competition. Significant growth and traction since the Global Financial Crisis (GFC)
Private Debt	8%	Uncertainty regarding the credit cycle and the economy.
Others (Infrastructure, Natural Resources, arts & collectibles)	8%	The emergence of funds beyond conventional energy resources (Agriculture Funds, Renewables Funds). Poor returns among other private asset class (~1.5%)

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Alternative Investment Management FAQs

What is alternative investment management?

Alternative Investment management is a practice of investing in assets rather than traditional assets such as stocks, bonds, and cash. It includes a wide variety of assets, such as hedge funds, real estate, private equity, etc.

What is the most popular alternative investment?

Real estate is one of the most popular alternative investment assets. It is also considered the world's biggest asset class, consisting of farmland, and all real estate.

Why alternative investments?

Alternative investment assets behave differently from traditional investment assets such as equity and stocks. Adding them may help to lower volatility and provide higher returns with effective broader diversifications.