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Overview of Alternative Investments and Real Estate

May 1, 2025

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.