Alternative Investments

Written by admin on April 14th, 2011

Traditional investments include cash, bonds and of course, stocks. Alternative investments are typically higher risk because of the trading styles, limited regulations and lack of liquidity. Alternative investments also have high minimum investment amounts and charge a higher fee to manage portfolios. Four common types of alternative capital investments are venture capital funds, hedge funds, managed futures accounts and real estate investment trusts, or REITs.

Venture capital or VC funds are similar to hedge funds, but the main investment of the fund is ownership in emerging and growth companies. Managers of venture capital funds look for accredited investors who purchase shares in the fund itself. Once the fund accumulates the necessary capital to acquire its company purchases, the fund begins operations. The life of a typical venture capital fund is 10 years, after which the focus shifts to liquidating the investments and allocating the profits to the venture capital investors. Venture capital funds are not liquid. They are meant to be buy-and-hold investments. Since emerging and growth companies are highly risky, venture capital funds may invest in a dozen or more companies with only one to two companies generating a positive return on investment.

Hedge funds are funds that invest in a range of investments including equities and commodities. The objective of managers of hedge funds is to offset potential losses by hedging their investments using various trading styles. Hedge funds are typically available to accredited investors. An accredited investor is a person who has an income of 0,000 per year or has a net worth of million. This investor criteria provides the hedge fund with an exemption from security regulations governing leverage, derivative contracts and short selling. Performance fees charged by fund managers range from 20 percent to 35 percent and management fees may be upward of 2 percent per year. There is no public market for hedge funds. Accredited investors purchase hedge funds through registered commodities dealers.

Managed futures accounts are managed and operated by a licensed money manager or commodity trading advisor CTA on behalf of the account holder—the investor. A money manager’s investment objective is to take long and short positions in futures contracts positions, government securities, and options on futures contracts. Typical investments include currencies, metal, interest rate, equity, energy and agricultural markets. While futures contracts are highly liquid, they possess a high degree of volatility. Like hedge funds, money managers charge a performance fee and a yearly management fee. Fees vary according to the capital amount under management.

REITs are companies that invest in real estate type investments. A REIT’s portfolio may consist of income-producing properties such as shopping centers, apartment buildings and even mortgages secured by real estate. Though considered relatively safe from a principal capital standpoint, REITs are not risk-free. If interest rates rise, the mortgage owed on the commercial properties will increase while the rent stays the same, resulting in a tighter profit spread. Re-leasing risk occurs when there is a high turnover in tenants, decreasing the flow of cash flow to the REIT. REITs are traded privately or on a public stock exchange and may be purchased through a securities broker-dealer. There is no minimum investment for publicly traded REITs and there are no fees associated in owning a REIT other than typical brokerage commissions.

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