115 CFA
File: Alternative Investments - Reading 50 - 1. Alternative investments

1. Alternative investments

a. compare alternative investments with traditional investments;

b. describe categories of alternative investments;

c. describe potential benefits of alternative investments in the context of portfolio management;

Why do alternative investments have lower liquidity than traditional investments?
They have lower liquidity due to their lack of standard markets and limited activities on both sides of the deal.

Do alternative investments have more or less regulation than traditional investments?
Alternative investments have less regulation but rather unique legal and tax considerations.

Do alternative investments have more or less transparency than traditional investments? Why?
They have lower transparency - certain alternative investments lack an efficient market mechanism and may subject their valuation to speculations, creating uncertainties. Risks of alternative investments increase due to absent of ready valuation information.

Do alternative investments have higher or lower fees than traditional investments?
Alternative investments have higher fees - costs of purchase and sale may be relatively high.

For alternative investments, what is the problem with historical risk data?
Alternative investments often have limited and potentially problematic historical risk and return data.

What is the strategy of a "passive" alternative asset manager?
Passive managers "buy-and-hold." There are very limited ongoing buying and selling actions. Their portfolios are expected to generate Beta return. Most alternative investment managers use active, alpha-seeking strategies. The assumption is inefficiencies exist that can be exploited to earn positive return after adjusting for beta risk.

What is one popular method to measure risk for alternative investments?
The sharpe ratio is is commonly used to measure downside risk and return of alternative investments. There are many others.

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