With the increasing popularity of alternative investments like private equity, venture capital, hedge funds, and real estate in recent years, job candidates are often asked about their knowledge and views on alternative investments in interviews, especially for investment banking and asset management positions. This article provides useful strategies and sample answers for commonly asked interview questions on alternative investments, helping candidates demonstrate expertise and stand out from competitors.
Highlight the diversification benefits of adding alternative investments
Many alternative investments like private equity and real estate have low correlations with traditional stocks and bonds, making them effective portfolio diversifiers that can reduce risk through improved diversification. In interviews, candidates can highlight how adding alternatives can increase diversification and improve risk-adjusted returns for clients’ portfolios. For instance, one could say ‘Adding some exposure to private equity and real estate in a 60/40 portfolio provides additional diversification benefits and may improve long-term returns. Studies show allocations between 5-20% to alternatives like these can reduce overall portfolio risk.’
Emphasize how alternatives can increase returns and yield
In a low yield environment, alternatives like real estate, MLPs, and BDCs can provide higher income streams than traditional stocks and bonds. Candidates can point this out as a key benefit and explain how it applies to different alternatives. For example, ‘With yields so low on bonds, we’ve seen increased client demand for alternatives that can provide higher income. Business development companies (BDCs), for instance, offer average dividend yields of 8-10%, much higher than typical bond yields.’
Discuss appropriate alternatives for different client types
Interviewers often ask which alternatives you would recommend for clients with certain needs and risk profiles. Tailor your suggestions to the client’s characteristics described. For conservative clients concerned about volatility, suggest lower risk options like real estate and structured products. For those focused on high returns, private equity or venture capital may be suitable. And emphasize the importance of setting proper client expectations on liquidity, risk, time horizon, etc.
Demonstrate your knowledge of major alternative asset classes
Interviewers want to see you have breadth of knowledge across alternatives. When asked to discuss or compare specific ones, highlight key traits like liquidity, risk, return drivers and fee structures. For instance, for hedge funds discuss their absolute return objectives, use of leverage and performance fees. For private equity, touch on illiquidity, the J-curve effect, capital lockups and potential for higher returns from value creation.
Show interest in learning more about evolving alternative investments
The alternatives space is constantly evolving with new strategies and products emerging. Convey curiosity and interest in expanding your alternatives knowledge for the benefit of clients. For example, ‘While I have a solid grasp of major alternative asset classes, I’m excited to continue developing my expertise in newer areas like litigation finance, royalties and digital assets.’ This demonstrates awareness of cutting-edge alternatives and a passion for staying informed.
With strong, tailored responses that demonstrate expertise across major alternative investments while conveying enthusiasm for learning, candidates can stand out in the interview process and better position themselves for jobs involving alternatives.