Question

Why Hedge Funds, Private Equity, Venture Capital, Infrastructure funds, Commodity funds and Real Estate referred to as Alternative investments? Your answer must include

(i) valuations difficulties and

(ii) diversification benefits.

Answer 1

Hedge Funds, Private Equity, Venture Capital, Infrastructure funds, Commodity funds and Real Estate referred to as Alternative investments because they don't fall under conventional investment categories i.e. stocks, bonds etc. These investments have high minimum investment and fees but transaction cost are lower because of lower turnover. These are difficult to vaue as well because many real estate and private equity transactions are non-public in nature so it makes it difficult to track last market price. They give diversification benefits also as their benefits show low correlation to stocks and bonds and therefore can reduce volatility without reducing returns.