Title: Investment Management Overview
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Alternative
# Investments Part I
Real Estate, Private Equity, Hedge Funds, Commodities
> Fernando Forcada, CFA
> Selected Topics, March 2025
# 1Alternative Investments
# Definition
Alternative investments comprise groups of investments with risk
and return characteristics that differ markedly from those of
traditional stock and bond investments
Note : Alternative investment has no universally accepted definition
Alternative Investments fall outside of the definition of long -only,
publicly traded investments in stocks, bonds, and cash
Traditional investments include :
Public equities (corporate stocks)
Investment -grade bonds (debt issued by corporations and governments)
Money Market/Cash
Established methods used for traditional investments are not sufficient
for managing and analyzing alternative investments
# 2Alternative Investments Main
# Characteristics
Common features of alternative investments include :
Relative illiquidity (associated with a return premium as compensation )
High asset manager specialization
High due diligence costs
In general, still low correlation of returns with those of traditional
investments (diversifying potential)
Less regulation and less transparency than traditional investments
Limited and potentially problematic historical risk and return data
(difficult performance evaluation because of the complexity of establishing valid
benchmarks)
Unique legal and tax considerations
Incentive -based fees for asset managers to address information asymmetry
Management of alternative investments is typically active
# 3History of Alternative Investing
The change in investment practices from evaluating risk on a stand -alone basis
to a portfolio -as -a-whole basis was a clear milestone in alternative investing (in
the 1950 s and 1960 s, Modern Portfolio Theory established the mechanics and
advantages of diversification, evaluating risk on a portfolio basis)
AuM in vehicles classified as alternative investments have grown rapidly since the
mid -1990 s
During 2008 the enthusiasm for alternative investments was tested, when AuM in
alternative investment declined as losses were incurred and investors withdrew funds
From 2012 , a resurgence of interest in alternative investments has occurred, with
alternative investments growing rapidly during the low -yield world (until 2022 )
# 4CAIA Association, 2018 Reasons to invest in Alternative
# Investments
The three key reasons for adding alternative investments to a well -
diversified portfolio :
Reduced Risk through Diversification : One of the distinguishing features
of most alternative investments is their lack of correlation with the major
traditional asset classes
Enhanced Return through Alpha : Alternative investing has a track record
of offering opportunities that can enhance the risk -adjusted returns of well -
diversified portfolios
Avoiding Obsolescence : Institutional investors who are the last adopters of
institutional -quality asset classes may find that prices have adjusted such that
the greatest opportunities have been missed (first -mover advantage)
# 5Global AuM and Revenue
Alternative Assets : 20 % of Global AuM and 54 % of Global Revenue
# 6
Source: BCGs Global Asset Management
Market Sizing Database, 2024 Global AuM and Revenue
Private Equity and Private Debt Are Expected to Generate About
70 % of Total Revenue from Alternatives by 2028
# 7
Source: BCGs Global Asset Management
Market Sizing Database, 2024 Reasons to invest in Alternative
# Investments
>
Alternative Investments Historical Returns and Volatilities
# 8Challenges of using Alternative
# Investments
During periods of economic crisis , such as late 2008 , correlations
among risky assets can increase dramatically
Reported return data can be problematic :
Reported returns and standard deviations are averages and may not be
representative of sub -periods, given the great dispersion of results
Many investments, such as direct real estate and private equity, are often
valued using estimated (appraised) values
Some alternative investments contain more tail risk than
traditional investments
The following tasks may be useful in avoiding tail risks :
Do the Due Diligence
Monitor the Funds
Pay Attention to the Fund culture
# 9 Regulatory restrictions and self -imposed limitations with internal
investment policy statements
The costs of due diligence in alternative investments may be a
limiting factor for smaller portfolios
Illiquidity is another limiting factor in the size of the allocation to
alternative investments for investors with short investment horizons (in
contrast to long -term investors looking for illiquidity premium)
The size and type of some alternative investments may also be
prohibitively large for certain investors
Sophisticated investors with the longest investment time horizons, such as
large pension funds or sovereign wealth funds, tend to allocate a larger share of
their portfolio to these assets
# 10
# Challenges of using Alternative
# Investments Types of Alternative Investments
Historically, RE, Private Equity, and commodities have been viewed as the primary
alternatives
In recent years, additional investments (modern alternative investments) have
appeared, such as hedge funds or distressed debt
Real Assets are sometimes defined as any economic resource (other than human
capital) directly used to create value . They have value as a direct claim on
productivity, in contrast to financial assets that are claims on cash flows .
Real assets include tangible assets (infrastructure, land, farmland, timber ) but also
intangibles (intellectual property), such as patents and copyrights, or fine art
# 11 Questions
>
Relative to traditional investments, alternative investments are least
likely to be characterized by :
A High levels of transparency
B Limited historical return data
C Significant restrictions on redemptions
>
Solution : A is correct . Alternative investments are characterized as
typically having low levels of transparency
>
Compared with traditional investments, alternative investments are
more likely :
A Greater use of leverage
B Long -only positions in liquid assets
C More transparent and reliable risk and return data
>
Solution : A is correct . Investing in alternative investments is often
pursued through such special vehicles as hedge funds and private equity
funds, which have flexibility to use leverage . Alternative investments include
investments in such assets as real estate, which is an illiquid asset, and
investments in such special vehicles as private equity and hedge funds,
which may make investments in illiquid assets and take short positions .
Obtaining information on strategies used and identifying reliable measures
of risk and return are challenges of investing in alternatives
# 12 Questions & Answers
>
Relative to traditional investments, alternative investments are least
likely to be characterized by :
A High levels of transparency
B Limited historical return data
C Significant restrictions on redemptions
>
Solution : A is correct . Alternative investments are characterized as
typically having low levels of transparency
>
Compared with traditional investments, alternative investments are
more likely :
A Greater use of leverage
B Long -only positions in liquid assets
C More transparent and reliable risk and return data
>
Solution : A is correct . Investing in alternative investments is often
pursued through such special vehicles as hedge funds and private equity
funds, which have flexibility to use leverage . Alternative investments include
investments in such assets as real estate, which is an illiquid asset, and
investments in such special vehicles as private equity and hedge funds,
which may make investments in illiquid assets and take short positions .
Obtaining information on strategies used and identifying reliable measures
of risk and return are challenges of investing in alternatives
# 13 Digital Assets
Digital assets are a relatively new investment class that covers assets
that can be created, stored, and transmitted electronically and have
associated ownership or use rights
This class includes a wide variety of digital assets, including
cryptocurrencies , tokens , and digital collectables(*)
Based on the innovative distributed ledger technology (DLT), or
blockchain technology , digital assets utilize advanced encryption
techniques that assure the authenticity of digital assets
As with other types of alternative investments, digital assets have
characteristics distinct from traditional investments
Digital assets offer investors diversification while providing higher
expected returns than traditional investments provide . However, their
risks are also higher
# 14
NEW
ASSET
CLASS
> (*)A digital collectible is a unique or limited -edition copy of a virtual item. Digital collectibles use blockchain
> technology to create non -fungible tokens (NFTs) that allow for distribution and transfers in ownership
# Cryptoassets
Cryptocurrency definitions :
A cryptocurrency is a digital version of a private currency understood as a
means of exchange
Transactions are recorded and verified on a decentralized(*) ledger using
cryptographic algorithms by a community of users incentivized to
maintain the integrity of the ledger by being rewarded with new units of
the currency
(*)These instruments are decentralized because they do not require the
intervention of a centralized authority to validate and authenticate transactions
Source : Cryptoassets : Beyond the Hype . CFA Institute, 01 /2023
Cryptocurrencies are the native currencies of their underlying public
blockchains
Public blockchain users and investors must pay network participants when
using the blockchain
They pay in the blockchains native cryptocurrency
Thus, the demand for a specific cryptocurrency is driven by the demand for
the underlying blockchain
Public blockchains vary in design and serve different purposes
Source : DWS International GmbH , 04 /2024
# 15 16
# The Crypto Landscape
Source: CoinMarketCap.com. Data as of March 18, 2025 17
# Cryptocurrencies Market Cap
Source: CoinMarketCap.com. Data as of March 18, 2025 Real Estate
Real estate investing is often defined as direct or indirect ownership
in real estate property (such as land and buildings)
It also includes lending (debt investing) against real estate property ,
which generally serves as collateral or guarantee for the lending (such as MBS)
For centuries, individual investors have owned interests in real estate,
primarily in the form of residential and agricultural properties
Between one -third and one -half of the worlds wealth is estimated to be
represented by real estate
Key reasons for investing in real estate include the following :
Potential for competitive long -term total returns driven by both income
generation and price appreciation
Likelihood that less -than -perfect correlation with other asset classes may
provide diversification benefits
Potential to provide an inflation hedge if rents can be adjusted quickly for
inflation
Prospect that multiple -year rental contracts with fixed rents for some
property types may reduce cash flow effects from economic shocks
# 18 Real Estate
Direct investment (direct ownership) :
Residential property includes single -family houses and multi -family
properties , such as apartments, and may be owner -occupied or rental properties
Commercial real estate includes office, retail, industrial and warehouse, and
hospitality (e .g., hotel and motel) .
Note : Residential properties owned with the intention to rent them might be classified as
commercial .
These properties require active and experienced, professional management . Commercial
real estate is by far the largest class of real estate for investment
Agricultural land :
Timberland (can be used to produce timber wood for use in the forest products
Industry)
Farmland (can be used to produce crops or as pastureland for livestock)
Differences : While crops and livestock are produced annually, timber has a much longer
growing cycle before the product is saleable . Also, the harvesting of timber can be deferred
if market conditions are perceived to be unfavorable
# 19 Real Estate
Indirect investment :
Real estate investment trusts (REITs), similar to FIBRA ( fideicomiso de
inversin en bienes races ) in Mexico
Equity REITs , which invest primarily in commercial or residential properties and use
leverage
Mortgage REITs , which invest primarily in mortgages
Securities issued by companies engaged in real estate ownership,
development, or management , such as homebuilders and real estate operating
companies
Infrastructure funds , which in cooperation with governmental authorities, make
private investment in public infrastructure projects such as roads, tunnels,
schools, hospitals, and airports in return for rights to specified revenue streams
over a contracted period ( concesin in Spanish)
# 20 Real Estate
The basic indivisibility , unique characteristics (no two properties
are identical), and fixed location of real estate property have
implications for investors :
The size of investment may have to be large and may be relatively illiquid
Real estate property typically requires operational management and
maintenance cost
Real estate brokers charge high commissions relative to securities
transaction fees
Real estate may be subject to government regulations affecting what can be
done to modify the existing property or to whom and how ownership can be
transferred
Local or regional markets can be independent of countrywide or global
price movements , because local factors may override wider market trends
# 21 Real Estate
The lack of reliable, high -frequency transaction data for properties
requires the use of appraisal -based valuations . Common techniques
for appraising real estate property include :
Comparable sales approach determines an approximate value based on
recent sales of similar properties
Income approach discounts future projected cash flows/net operating income
to arrive at a PV for the property (inputs : cap rate, residual value, vacancy
rate ... )
Cost approach evaluates the propertys replacement cost by estimating the
market value of the land and the costs of rebuilding using current construction
costs and standards
# 22 Real Estate
Main factors to consider when investing in Real Estate :
Location is, probably, the most critical factor in determining value (location,
location, and location ):
Prime zone vs . suburbia / developing zone vs . consolidated zone
Services (schools, hospitals, shopping centers ), Transportation (metro, highway ) in the
area
Supply/Demand growth in the area :
Supply factors : current and future building projects or available land to build in the
neighborhood/alternative areas
Demand factors : Economic outlook, salary growth, employment rate
Local regulations : building/refurbishment restrictions, taxes, carbon footprint requirements
Specific local factors :
What are customers demanding in that location? A Class -A building with a LEED 1 certification? A
residential building with luxury/expensive or basic/economical amenities?
What kind of building is most profitable for a particular location? For example, a refurbished office
building or a modern four -star hotel in Barcelonas downtown (Passeig de Grcia )?
# 23 (1) LEED is an abbreviation for Leadership in Energy and Environmental Design, an international certification for Green Build ing Real Estate
Main factors to consider when investing in Real Estate (cont .):
Robust business case with different scenarios to stress main economic variables :
Rental income projection (single tenant?, multi -tenant?, lease terms, rental growth)
Vacancy rates projection (vs . historical rates, current market rates)
Maintenance costs / Operational expenses projection / Property taxes / Insurance
Expected service (life) time of the building (depreciation) . Note : land is not amortized
Price appreciation (if any ; only land? ... )
Cap rate (capitalization rate) is the most popular measure through which real estate
investments are assessed for their profitability and return potential . It is the rate of return
that is expected to be generated : net operating income (NOI) divided by the current market
value
In -depth Due Diligence
# 24 Real Estate
# 25
Main factors to consider when investing
in Real Estate (cont .):
Property Management . This matrix
(based on income risk and
deterioration risk ) helps to define a
strategy on a property level :
>
Hold (keep it in the portfolio in order to
optimize and maximize value)
>
Sell (the market price is above the
estimated value)
>
Develop (we can add value to this asset) Real Estate
>
The main property types included in institutional investors
portfolios are (1)Office, (2)Retail, (3)Industrial and warehouse, and
(4)multi -family (apartments) :
> 1.
Office : the demand for office properties depends heavily on
employment growth especially in those industries that use large
amounts of office space, such as finance and insurance
The office sector tends to be more cyclical , with higher rents and
occupancy during times of economic strength, and vice versa .
There also has been a tendency for the average amount of space per
employee to decrease over time as technology has allowed more employees
to spend more time working away from the office and less permanent space is
needed
> 2.
Retail (from large shopping centers to small stores) : the demand
for retail space depends heavily on trends in consumer spending .
Consumer spending, in turn, depends on the health of the economy, job
growth, population growth, and savings rates
A unique aspect of many retail leases is the requirement that the tenants pay
additional rent once their sales reach a certain level . In some markets (with
high internet penetration), retail (physical stores) is challenged by the
rise in e-commerce 26 Real Estate
> 3.
Industrial and warehouse (logistics) properties : the demand for
industrial and warehouse space is heavily dependent on the overall
strength of the economy and economic growth . The demand for
warehouse space is also dependent on import and export activity in the
economy
On the flipside, one sector that is benefitting from the rise in e-
commerce is logistics
> 4.
Multi -family residential properties (to rent) : the demand for multi -
family spaces depends on population growth , especially for the age
segment most likely to rent apartments
The relevant age segment can be very broad or very narrow depending on the
propensity to rent in the culture . Demand also depends on how the cost of
renting compares with the cost of owning, and the financing conditions
# 27 Real Estate
Other (alternative) RE investments :
Student Housing
Senior Housing (Apartments / Senior residential suites for the elderly)
Hotels/Motels : Hotels are usually considered riskier because there are no leases,
and their performance may be highly correlated with the business cycle
Parking facilities
Other aspects to consider :
Some buildings intended for one use may not easily be adapted for
other uses . For example, buildings used by universities and hospitals may
not easily be adapted to other use
Some properties are more management intensive than others : hotels
require the most day -to -day management . Shopping centers (shopping malls)
are also relatively management intensive
# 28 Real Estate Questions
>
An investor is interested in adding real estate to her portfolio for the first time . She
has no previous real estate experience but thinks adding real estate will provide some
diversification benefits . She is concerned about liquidity because she may need the
money in a year or so . Which form of investment is most likely appropriate for
her?
A Shares of REITs
B Mortgage -backed securities
C Direct ownership of commercial real estate property
>
Solution : A is correct . She is probably better -off investing in shares of publicly
traded REITs, which provide liquidity, have professional management, and require a
lower investment than direct ownership of real estate . Although REITs are more
correlated with stocks than direct ownership of real estate, direct ownership is much
less liquid, and a lot of properties are needed to have a diversified real estate portfolio .
Also, adding shares of REITs to her current portfolio should provide more
diversification benefits than adding debt in the form of mortgage -backed securities
and will allow her to benefit from any appreciation of the real estate . Debt
investments in real estate, such as MBSs, are similar to other fixed -income
investments, such as bonds (the difference is that their income streams are secured on
real estate assets) . In contrast, adding equity real estate investments to a traditional
portfolio will potentially have diversification benefits
# 29 Real Estate Questions
>
An investor is interested in adding real estate to her portfolio for the first time . She
has no previous real estate experience but thinks adding real estate will provide some
diversification benefits . She is concerned about liquidity because she may need the
money in a year or so . Which form of investment is most likely appropriate for
her?
A Shares of REITs
B Mortgage -backed securities
C Direct ownership of commercial real estate property
>
Solution : A is correct . She is probably better -off investing in shares of publicly
traded REITs, which provide liquidity, have professional management, and require a
lower investment than direct ownership of real estate . Although REITs are more
correlated with stocks than direct ownership of real estate, direct ownership is much
less liquid, and a lot of properties are needed to have a diversified real estate portfolio .
Also, adding shares of REITs to her current portfolio should provide more
diversification benefits than adding debt in the form of mortgage -backed securities
and will allow her to benefit from any appreciation of the real estate . Debt
investments in real estate, such as MBSs, are similar to other fixed -income
investments, such as bonds (the difference is that their income streams are secured on
real estate assets) . In contrast, adding equity real estate investments to a traditional
portfolio will potentially have diversification benefits
# 30 Real Estate Questions
>
Which is a riskier investment, direct ownership (equity) real
estate or investment -grade bonds? Explain why
>
Solution : Empirical evidence suggests that private equity real estate
is riskier than bonds . Although real estate leases offer income streams
somewhat like bonds, the income expected when leases renew can be
quite uncertain and depend on market conditions at that time, which is
unlike the more certain face value of a bond at maturity
>
Which of the following is least likely to be considered an
alternative investment? :
A Real Estate
B Commodities
C Long -only equity funds
>
Solution : C is correct . Long -only equity funds are typically considered
traditional investments and real estate and commodities are typically
classified as alternative investments
# 31 Real Estate Questions
>
Which is a riskier investment, direct ownership (equity) real
estate or investment -grade bonds? Explain why
>
Solution : Empirical evidence suggests that equity real estate is
riskier than bonds . Although real estate leases offer income streams
somewhat like bonds, the income expected when leases renew can be
quite uncertain and depend on market conditions at that time, which is
unlike the more certain face value of a bond at maturity
>
Which of the following is least likely to be considered an
alternative investment? :
A Real Estate
B Commodities
C Long -only equity funds
>
Solution : C is correct . Long -only equity funds are typically considered
traditional investments and real estate and commodities are typically
classified as alternative investments
# 32 References
>
Introduction to Alternative Investments . Terri Duhon, George Spentzos ,
CFA, FSIP, and Scott D. Stewart, CFA . CFA Institute 2017
>
Alternative Investments : A Primer for Investment Professionals . Donald
R. Chambers, CAIA, Keith H. Black, CFA, CAIA, and Nelson J. Lacey, CFA
>
Alternative Investments Portfolio Management . Jot K. Yau , PhD, CFA,
Thomas Schneeweis , PhD, Thomas R. Robinson, PhD, CFA, and Lisa R. Weiss,
CFA . CFA Institute, 2007
>
Alternative Investments (Chapter 12 ). Sean W. Gill, CFA . CFA Institute
2014 . Investment Foundations
>
Private Real Estate Investments . Jeffrey D. Fisher, PhD, and Bryan D.
MacGregor, PhD, MRICS, MRTPI . CFA Institute, 2012 .
>
The Rise of Alternative Assets and Long -Term Investing . Yue Liu, Sally
Sun, Roy Huang, Tjun Tang, and Xinyi Wu . The Boston Consulting Group
>
Cryptocurrencies : coining a craze . Christopher F Chapman . Citi Research,
2017
>
https ://www .hedgefundresearch .com/
>
https ://www .investopedia .com
# 33 Annex: Alternative Investments
# Real Estate
# 34
Real Estate is commonly believed to be a safe investment, which prices
generally never go down, but
US National Home Price Index Spain Home Price Evolution
Peak -to -trough variation: -41% Peak -to -trough variation : -27%
Source: https://www.tinsa.es/precio -vivienda/ Source: https://fred.stlouisfed.org/series/CSUSHPINSA