Description of Alternative Investments
Hedge Funds Hedge funds employ strategies to offer their investors absolute returns (net... Read More
Every possible investment choice is either an alternative or a traditional investment. Traditional investments are investments in:
In this context, traditional is not a synonym for “common.” Likewise, alternative is not a synonym for “unusual.” Alternative investments include assets such as:
Alternative investments often supplement traditional investments held in a portfolio.
An investor should consider alternative investments for a number of reasons. To begin with, alternative investments offer a range of investments that have low correlations with traditional investments.
In addition, alternative investments allow investors to enhance the risk-return characteristics of their portfolios and increase their returns. Last but not least, alternative investments improve an investor’s return potential thanks to their higher yields.
Alternative investments have the characteristics listed below:
Alternative investments are divided into broad categories:
Hedge funds employ numerous strategies to offer investors optimal returns. These private funds are actively managed—often by “star investors”—and apply aggressive strategies across asset classes. Most hedge funds use derivatives, high leverage, arbitrage, and other investment strategies unavailable to traditional fund managers. Redemptions are typically restricted in some way such as lockup periods, notice periods, and redemption fees.
Other alternative investments include collectibles and other investments that don’t fall into the traditional categories. Collectors have been around for centuries, and the investments are as varied as the collectors themselves. Traditional collectibles such as stamps, cars, furniture, gems, fine art, and others still dominate the market. However, new collectibles, such as baseball cards, action figures, and almost anything you can imagine, offer investors new ways to invest their money outside traditional financial markets.
There are indices used to track the values of certain collectible markets, such as stamps, and these collectibles are auctioned in small markets. It is worth noting that some auctions are open to the public while others are not.
Question
Which of the following is most likely an example of private equity investment?
A. Investing in a mutual fund.
B. Investing in a publicly traded company.
C. Investing in a new or established business not listed on a public exchange.
Solution
The correct answer is C.
Private equity investments involve investing in companies that are not publicly traded and are usually acquired by private equity firms or funds. The aim of these investments is to provide capital to help the company grow and improve and eventually sell the company for a profit.
A is incorrect. Investing in a mutual fund (A) is typically a traditional investment strategy where investors pool their money to invest in a diversified portfolio of stocks, bonds, or other assets.
B is incorrect. Investing in a publicly traded company is also typically a traditional investment strategy, where investors buy shares in a publicly traded company on a stock exchange.