What is an Alternative Investment?

The so-called alternative investment refers to investing in financial and physical assets other than traditional stocks, bonds and cash, such as real estate, securitized assets, hedge funds, private equity funds, commodities, art, etc. Subprime mortgage-based bonds and derivative financial products of these bonds were introduced.

Alternative Investments

Alternative investment is a general term for non-mainstream investment vehicles other than investment vehicles such as stocks and bonds, including hedge funds, private equity funds, real estate and OTC derivatives, etc. ^[1]

A fundamental idea of alternative investment operations is that the market may not necessarily be efficient, and the prices of many companies and projects do not reflect their intrinsic value, so the farther away they are from the public trading platform, the higher the deviation between price and value may be. The focus of alternative investment is on companies and projects that are not listed but have packaging potential.

Alternative investment factors

An important factor in the explosive growth of alternative investment is the booming global real estate industry and soaring commodity prices. Property investment has always been a main direction of alternative investment. Many people who want to buy office buildings in New York and London, residences in Shanghai and Mumbai, hotels in Phuket and Sydney, and people who want to diversify their risks and do nt need to be involved in management have invested their funds Leave it to the alternative investment fund to manage it in the form of an investment portfolio. Mining used to account for a small proportion of alternative investments in the past, but with the energy and commodity bull markets, it has also become one of the main businesses of some alternative funds.

Alternative investment history

Alternative investments have long existed, but in the past, they have always been a game in the small circle of rich people, with high risks and low transparency. But the alternative investment funds in the past 30 years the average annual return rate of 24%, far higher than the 11% and 14% of mutual funds of hedge funds (hedge fund data only for the past l5 years). High returns and improved transparency have attracted a large number of retirement funds, university funds, and charitable funds to join, which has led to unprecedented development of alternative investments in the past decade, with the total size soaring 50 times to $ 800 billion (excluding leverage Borrowing), and began to penetrate from Europe and America to Asia. The most active in China is private equity investment. The acquisition of SDB by Xinqiao and the acquisition of XCMG by Carlyle have caused shocks in China. Overseas land funds sweeping domestic office buildings and shopping malls are also the subject of media talk.

Another opportunity for the rise of alternative investment is the global flood of liquidity and reduced risk awareness among investors. Excessive funds chasing limited assets, driving up the valuation of the bond market and the stock market. Cheaper goods on public trading platforms are increasingly difficult to find, so funds seek alternative opportunities.

What criticizes alternative investment is the extremely high threshold. To enter alternative investment funds, at least US $ 1 million was required in the past, and some funds even required US $ 5 million. This not only keeps small and medium investors out, but not all wealthy people are willing to invest so much money in one place. However, the barriers to entry have fallen significantly and the forms have become diverse. Some alternative fund subscriptions have begun to approach the mutual fund approach, and the admission fee has been reduced to US $ 50,000. Private equity fund KKR is listed in Amsterdam, and land acquisition fund Fomess is listed in New York. For small investors who want to get involved in non-listed investment projects but are not willing to lock up their funds, less "alternative" alternative investments are within reach. Leveraged buyout giant Blackstone (Black stone) fund on March 22, 2007 a formal application IPO, raising $ 4.0 billion. The listing of Blackstone has opened a new page in history for alternative investments.

Alternative investment returns

It's no secret that alternative investment returns are high. Since its establishment in 1987, the average annual return of Blackstone's flagship private equity fund has been 30.8%, and after deduction of management fees, it has been 22.8%, which is much higher than the average return of "non-alternative" funds. Blackstone's recently disclosed documents show that it manages US $ 78.7 billion in assets. In 2006, it invested a net income of US $ 7.6 billion and a net income of US $ 2.6 billion. The 767 employees (including 335 professionals) each created an average of US $ 3.3 million in wealth, more than three times higher than Goldman Sachs, which has a strong position in investment banking.

Alternative investment will certainly be an important force in the international financial market in the future. Leverage has increased its lethality. The reorganization consciousness of alternative investments often brings shocks and even revolutions to the companies, industries, and markets in which they are involved. At the same time, the increased transparency of alternative investments and listing activities have, to some extent, pushed private trading platforms to the public eye, public investment, and even public trading platforms. The boundary between private and public has become blurred, reducing the risk of black box operations and creating conditions for public participation. However, in any sense, alternative investment is still a high-risk, high-return category, and should only be used as a supplement to securities investment.