With the increasing interest in alternative investments, more investors are looking into PDF reports and documents to learn about different alternative investment strategies before putting their money in. However, the alternative investment landscape tends to get quite technical and complex for the average investor. This article provides a critical analysis of some of the most popular alternative investment strategies based on in-depth research.
real estate investing has relatively low liquidity but offers steady cash flows
The CFA level 1 study material highlights real estate as a major component of alternative investments, known for relatively low liquidity but steady cash flows in the form of rental income. However, the 2008 financial crisis showed the downside of highly leveraged real estate investing when property values declined sharply. Conservative investors should focus on calculating correct cap rates, analyzing trends in rental income, and avoiding excessive leverage.
private equity requires large upfront capital and has higher risk
As the CFA level 3 study guide explains, private equity involves investing in private companies before they get listed on stock exchanges. While the returns can be very high if the company has a successful IPO, private equity also requires large upfront investments and has higher risk. Most private equity funds are only open to accredited investors due to these reasons.
hedge funds have delivered mixed long term returns with high fees
Hedge funds employ a variety of complex trading strategies involving derivatives, short selling, leverage etc. They promise absolute returns regardless of market conditions. However, research shows most hedge funds have failed to deliver market-beating returns over 10-20 years while charging excessively high fees. Only top hedge fund managers with long term track records may be worth the high performance fees.
commodities trading requires extensive research and disciplined risk management
Commodities like gold, silver, oil etc. offer diversification for investment portfolios. However, commodities prices tend to be very volatile. Becoming a successful commodities investor requires being on top of factors influencing supply and demand, assets valuation models, and having robust risk management systems. Overall, commodities should be a small allocation in a well-diversified portfolio.
crypto investing has extreme volatility and needs caution
While the incredible gains from cryptos have attracted many investors, Bitcoin and other digital currencies have also experienced gut-wrenching declines. The CFA reading material cautions that crypto valuation depends almost wholly on speculator sentiment. Crypto investors need strong stomachs for extreme volatility and ability to avoid panic selling at market bottoms. Cryptos may retain a place in well-diversified portfolios focused on the long term.
In summary, while alternative investments like real estate, private equity, hedge funds, commodities, crypto etc. offer potential diversification benefits, they also carry higher risk and require extensive research and disciplined risk management. Conservative investors should limit alternative investment exposure to small allocations in an overall portfolio.