Alternative Investments is a term that is commonly used, however is quite broad. The following is a list of some of the products types categorized as ‘Alternative Investments’, what Alternative Investments are generally not, and who can invest in Alternative Investments. Alternative investment providers are typically compensated by management fees and incentive fees (i.e. these money managers are typically paid via management fees and performance fees).
Alternative Investment Product Types
Managed Futures are Alternative Investment products that use a professional money manager who decides on when and what is bought or sold for a profit or loss (I know I for one don’t forget what the markets did in 2008!) in exchange for a percentage of the returns. These Alternative Investment managers are providing their trading decision making skills and apply them to your investment account. Managers are paid management fees and incentive fees. Numerous investment types pay their managers in a similar fashion.
A hedge fund is a private investment fund that participates in a range of assets and a variety of investment strategies intended to protect the fund’s investors from downturns in the market while maximizing returns on market upswings. The Hedge Fund Manager applies a trading strategy and allows a limited number of participants to be involved. Hedge Funds have limitations surrounding the qualifications of their investors.
Private Equity Offerings
Private Equity is an Alternative Investment consisting of equity securities that are not listed on, or traded on public Equity Markets.
Currency Funds is an Alternative Investment where an investment manager provides professional management through an Investment Strategy of publicly traded currency products.
Limited Partnerships is an Alternative Investment where a form of partnership is formed where there is one or more general partner who manages the operations, and one or more limited partners who hold limited liability – they are only liable on debts incurred by the firm to the extent of their investment, and have no management authority.
Futures are an Alternative Investment which is comprised of a standard contract between two parties to exchange an asset, but with delivery on a future specified date. These products are traded on a Futures Exchange.
Options are an Alternative Investment which provides the option to purchase/sell a specified product at a reference price which is typically referred to as a “strike” price. The owner of the option has the right, but not the obligation to purchase/sell.
Leaps are an Alternative Investment which stands for Long Term Equity Anticipation Security, and are options of a longer term than traditional options. Typically, LEAPS are extended 2 years out.
What Alternative Investments are Not
Alternative Investments are investments outside the traditional vehicles: stocks bonds and cash.
• Stocks or Capital Stock represents business equity invested into a business by an individual called the stock holder. The ‘Stock’ serves as a record of the equity owned.
• Bonds are debt security where the owner of the ‘bond’ is paid interest or a coupon until the bond is completely paid off.
• Cash is another word for Money within its physical form.
Who Invests in Alternative Investments?
Individuals, Sophisticated Investors and Qualified Eligible Persons invest in Alternative Investments.
Individuals, who have the available capital to invest, have the opportunity to invest in some of the listed Alternative Investments. Managed Futures are available for Individuals.
Sophisticated investors invest in Alternative Investments because the criteria they meet provide logical association to the risks of Alternative Investments. Sophisticated investors have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. To be classified as a sophisticated investor, a person must either have a net worth of $2.5 million or have earned more than $250,000 in the past two years.
QEP or Qualified Eligible Persons are Investors that meet the following requirements
- investment companies registered under the Investment Company Act (i.e. mutual funds)
- certain business development companies (defined under both the Investment Company Act and Investment Advisers Act)
- banks, savings and loan associations, and other like institutions acting for their own accounts or for the account of a QEP
- insurance companies acting for their own account or for the account of a qualified eligible person
- plans established and maintained by various governments and related bodies for the benefit of their employees, if such plan has total assets in excess of $5,000,000
- employee benefit plans within the meaning of the ERISA
- 501(c)(3) organizations with total assets in excess of $5,000,000
- corporations, business trusts, partnerships, LLCs or similar business ventures with total assets in excess of $5,000,000 and not formed for the specific purpose of participating in the exempt investment program
- a natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of either his purchase in the exempt pool or his opening of an exempt account exceeds $2.5 Million
- A natural person who had an individual income in excess of $250,000 in each of the two most recent years.
- pools, trusts, insurance company separate accounts or bank collective trusts, with total assets in excess of $5,000,000
- other entities authorized by law to engage in such transactions
Alternative Investments are not for everyone, which should be clear from the diverse product range, and expectations for qualifying to invest.