Investment Management Overview

Alternative Investments

Definition

• Alternative investments differ from traditional stock and bond investments.
• No universally accepted definition.
• Fall outside of long-only, publicly traded investments in stocks, bonds, and cash.
• Traditional investments include public equities, investment-grade bonds, and money market/cash.

Main Characteristics

• Relatively illiquid, offering a return premium as compensation.
• High asset manager specialization and due diligence costs.
• Low correlation with traditional investments, offering diversification potential.
• Less regulation and transparency compared to traditional investments.
• Unique legal and tax considerations.
• Typically actively managed.

History of Alternative Investing

• Shift from risk evaluation on a stand-alone basis to a portfolio basis in the 1950s-60s.
• Growth in alternative investments since the mid-1990s.
• Resurgence post-2012 due to low-yield environments.

CAIA Association's Reasons to Invest in Alternatives

• Reduced Risk through Diversification: Lack of correlation with traditional asset classes.
• Enhanced Return through Alpha: Opportunities for risk-adjusted returns.
• Avoiding Obsolescence: First-mover advantage in institutional-quality asset classes.

Global AuM and Revenue

• Alternative assets constitute 20% of global AuM and 54% of global revenue.
• Private equity and private debt expected to generate about 70% of total revenue by 2028.

Challenges of Alternative Investments

• Correlation among risky assets can increase during economic crises.
• Reported returns may not represent sub-periods accurately.
• Tail risk management: due diligence, fund monitoring, attention to fund culture.

Regulatory and Internal Policy Challenges

• High due diligence costs and illiquidity are limiting factors.
• Larger allocations to sophisticated investors with long-term horizons.

Types of Alternative Investments

• Historically include real estate, private equity, commodities.
• Modern alternatives include hedge funds, distressed debt.
• Real assets include infrastructure, land, intellectual property, etc.

Digital Assets

• Encompass cryptocurrencies, tokens, digital collectibles.
• Based on blockchain technology.
• Offer diversification and higher expected returns, but higher risks.

Real Estate

• Defined as direct or indirect ownership in property or lending against property.
• Represents a significant portion of global wealth.
• Offers long-term returns, diversification benefits, and potential for inflation hedges.

Direct vs Indirect Investment

• Direct Investment: Residential and commercial properties, agricultural land.
• Indirect Investment: REITs, mortgage REITs, infrastructure funds.

Factors in Real Estate Investment

• Location is critical: prime zones, services, transportation.
• Supply/demand growth, local regulations, and specific local factors.
• Real estate management and maintenance costs.

Appraisal Techniques

• Comparable sales, income approach, and cost approach.

Types of Real Estate

• Office, retail, industrial/warehouse, multi-family properties.
• Other alternatives: student housing, senior housing, hotels, parking facilities.

Real Estate Questions

• REITs provide liquidity and diversification for first-time investors.
• Direct ownership is riskier than bonds due to uncertain lease renewals.

References

• Various sources on alternative investments, real estate, and cryptocurrencies.

Annex: Real Estate

• Belief in real estate as a safe investment, though historical data shows significant price variations.