Categories of Alternative Investments

With no true consensus as to any “official” categories of alternative investments, it’s still useful to present a list to aid in your understanding.

Hedge Funds are private equity funds that hold a variety of traditional and alternative assets, long-and-short positions, often-high leverage, and seek absolute return for its investors.

Private equity funds invest in non-publicly-traded (“private”) companies, often with leveraged buyouts (LBOs) of profitable and cash-generating companies.  Venture capital is a subset of private equity, where investors provide start-up capital and equity financing for young companies.

Real estate is the investment in buildings, land, farms, and timberland through a variety of vehicles including ownership, mortgages, public equity (REITs), and mortgage-backed securities (MBS).

Commodities investments are physical goods such as oil, metals, and agricultural products along with their underlying securities such as forwards, futures, and investments in firms that deal in the commodities business.

Infrastructure investments are things like roads, bridges, toll networks, dams, and similar capital-intense projects.  Investors seeking infrastructure assets often use firm equity, bond issues, and other financial vehicles attached to these large projects.

Other alternative investments could include fine art, racing horses, rare automobiles, coinage, baseball cards, and anything worth collecting.

Question

Which of the following would most likely be categorized as an investment in commodities?

A. Wayne Gretzky’s National Hockey League rookie card

B. Three ounces of pure gold coins

C. Residential REITs

Solution

The correct answer is B.

Gold is a commodity. Wayne Gretzky’s National Hockey League rookie card would be categorized as others while residential REITs are real estate investments.

Reading 58LOS 58b:

describe categories of alternative investments