Assets classified as alternative investments have a low correlation and can achieve risk-adjusted returns that differ from those of traditional equity and fixed income investments.
What Are Alternative Investments?
What Is Private Equity?
Private equity investments are those that are made in private companies, as opposed to those available on public exchanges. The goal of private equity investments is to generate the best possible returns, which may be through capital appreciation, dividend payments or an eventual liquidation of the investment at a profit. Private equity can be used to finance company growth or to facilitate a corporate restructuring, such as a leveraged buyout (LBO). The financing typically comes in the form of senior debt or senior credit facility, mezzanine debt, or equity.
What is Venture Capital?
What Is Hedge Funds?
What Are Collateralized Loan Obligations (CLO)?
The CLO structure is often used to finance real estate investments, as well as other asset types such as corporate debt. The CLO is a securitization of a pool of debt, in this case, a portfolio of loans that finances the purchase of the real estate. The loans are pooled together and sliced into different risk levels, with the riskiest tranches receiving a higher payment than the less risky tranches. Investors in the CLO receive a return based on the performance of the underlying loans, but the return is often lower than the one on the underlying real estate itself.
What Is a Real Estate Investment Trust (REIT)?
A real estate investment trust (REIT) is a publicly traded company that owns commercial real estate assets like office buildings, malls, hotels, hospitals and apartments. REITs are structured as a pass-through entity, meaning they do not pay corporate taxes. Instead, they distribute most of their income to the shareholders in the form of dividends. REITs are a common alternative investment in taxable accounts, as they do not have special tax treatment like real estate held in a retirement account would. They come in different sizes, with the larger ones generally being more diversified, having lower management costs and a lower risk profile. REITs are subject to significant volatility and are not a good investment for someone who does not have a high-risk tolerance. Additionally, They have low yields, so their primary benefit is in providing tax-efficient income, but investors must be willing to accept the high volatility.