Alternative

Investments
By: Leonardo Hassan DI Gruccio
 Introduction
Alternative investments are financial assets that do not fit into traditional investment
categories. They provide a way to diversify your investment portfolio for reduced risk.
Alternative investments include private equity, hedge funds, real estate, commodities,
infrastructure, venture capital, and buyouts. Investors opt for alternative investments to
diversify their portfolios and earn higher returns.
 What Is Private Equity?
Private equity is an alternative investment where investors purchase shares in privately
owned companies. Alternative investment firms use private equity to buy businesses
they can ameliorate and revamp to sell for a profit. Alternative investment firms use
strategies such as buyouts, venture capital, credit, distress, and investing in real estate to
further increase earnings in different manners.
What Are The Different Types
Of Private Equity Strategies?
 Buyouts
When an alternative investment firm buys a company with a controlling interest, it's called a buyout. This
means the buyer acquires over 50% of the company, resulting in a change of control. Companies specializing
in funding and facilitating buyouts are often financed by institutional investors, wealthy individuals, or loans.
Private equity funds and investors look for underperforming or undervalued companies to take private and
turn around before going public. Buyout firms can be involved in management buyouts (MBOs), where the
purchasing management takes a stake or leveraged buyouts (LBO) funded with borrowed money. A
leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed
money to meet the acquisition cost. According to Investopedia, some of the most critical institutional funds
in the industry focused on buyouts are Blackstone Group, KKR & Co. Inc., CVC Capital Partners, The Carlyle
Group Inc., and Thomas Bravo.
 Venture Capital

Venture capital (VC) is a type of private equity and financing investors provide to small businesses and startup
companies with the potential for long-term growth. These investors can be wealthy individuals, investment
banks, or other financial institutions. VC can furthermore arrive from technical or managerial expertise. VC
deals frequently implicate selling large ownership shares of a company to a few investors through
independent limited partnerships established by venture capital firms. Some sub-strategies in venture capital
include adding value to the company, sourcing more promising companies, and investing in more profitable
companies. As there aren't any specific sub-strategies, substantial and successful venture capital funds have
perfected these tactics to come close to guaranteeing their prosperity in the investment. According to
Swfinstitute, some top venture capital firms by assets under management include Andreessen Horowitz,
Sequoia Capital, Dragoneer Investment Group, New Enterprise Associates, and Deerfield Management.
 Distress
Distressed debt trading is, simplistically, short-term
trading in troubled company debt. In distressed private
equity, firms invest in troubled companies' debt or
equity to take control of the companies during
bankruptcy or restructuring processes, turn the
companies around, and eventually sell them or take
them public. According to Mergersandinquisitions, some
of the largest distress buyout firms include Oaktree,
Cerberus, TPG, Centerbridge, Fortress, PIMCO, Apollo,
Ares, Brookfield, Bain Capital, and Blackstone (GSO
Capital Partners). Some crucial techniques for
distressed buyouts are debt restructuring, operational
improvements, strategic repositioning, asset sales,
management and governance changes, capital infusion,
and turnaround expertise.
 Private Credit
Private credit refers to debt financing provided to
companies by non-bank lenders or private credit
funds instead of traditional banks. It is a private debt
investment where investors provide capital to
borrowers in exchange for fixed-income returns.
Private credit fund targets the ownership of
higher-yielding corporate or financial assets held
within a private “lock-up” fund partnership structure.
Private credit can take various forms, including direct
Lending, mezzanine financing, unitranche Financing,
and distressed debt. According to Preqin, the most
significant private credit funds include Oaktree
Capital Management, Goldman Sachs Merchant
Banking Division, GSO Capital Partners New York,
Ares Management, and Intermediate Capital Group.
 Real Estate
Private equity real estate is an alternative investment
involving professionally managed pooled private and public
investments in the real estate markets. This investment
strategy entails acquiring, financing, and owning property or
properties through an investment fund and finding
high-net-worth investors and institutions such as
endowments and pension funds to invest in real estate
assets. General partners (GPs) invest in various property
types in different locations. These investments can be
structured as limited partnerships (LPs), limited liability
companies (LLCs), S-corps, C-corps, collective investment
trusts, private REITs, and separate insurer accounts.
According to Swfinstitute, some of the largest private equity
real estate investment firms include CBRE Inc, Hines Group,
Clarion Partners, Starwood Capital Group LLC, and Colliers
International.
 What Is a Hedge Fund?
A hedge fund is a group of managers that invest
money into liquid assets such as cash
equivalents, money market accounts,
marketable securities, short-term bonds, or
accounts receivable. A hedge fund is a private
investment fund that markets itself almost
exclusively to wealthy clients. A hedge fund is a
risk-seeking investment fund that uses leverage
to magnify returns. Hedge funds often have
more flexibility in their investment approach,
allowing them to engage in long and short
positions, derivatives trading, leverage, and
alternative investments to achieve higher
risk-adjusted returns potentially.
 What Are 10 Sub Strategies of Hedge Funds?
1. Long/Short Equity: This strategy involves taking long and short positions in individual stocks or equity indices to
profit from upward and downward price movements.
2. Global Macro: Global macro funds take positions in various asset classes, including stocks, bonds, currencies, and
commodities, based on macroeconomic trends and international events.
3. Event-Driven: Event-driven funds seek to profit from specific corporate events such as mergers, acquisitions,
restructurings, or bankruptcies by taking positions in the affected companies' securities.
4. Distressed Debt: Distressed debt funds invest in the debt of companies facing financial distress or bankruptcy,
aiming to profit from the potential recovery and restructuring of the distressed securities.
5. Relative Value: Relative value strategies involve identifying pricing discrepancies or relationships between
related securities, such as convertible bonds and their underlying equity, to generate returns from the
convergence of these prices.
6. Arbitrage: Arbitrage strategies aim to profit from pricing inefficiencies in different markets or securities.
7. Long/Short Credit: Long/short credit funds focus on the credit markets and invest in corporate bonds, credit
derivatives, and other credit instruments, taking long and short positions to capitalize on credit spread
differentials.
8. Quantitative/Algorithmic: Quantitative hedge funds use mathematical models and algorithms to make
investment decisions.
9. Multi-Strategy: Multi-strategy funds simultaneously employ a combination of different hedge fund strategies,
allocating capital across various sub-strategies based on market conditions and opportunities.
10. Commodity Trading Advisors (CTAs): CTAs trade in commodities, futures contracts, and other derivative
instruments, aiming to profit from trends and price movements in commodity markets.
Which Are The Large
Institutional Hedge Funds?
 BlackRock Advisors Bridgewater Associates
BlackRock (BLK) is a New
York-based investment manager
1 3 Bridgewater Associates is based
in Westport, Conn., and provides
that manages trillions of assets. services to institutional investors

AQR Capital Management Renaissance Technologies

AQR Capital Management 2 4 Renaissance Technologies is a
New York-based quantitative
is based in Greenwich,
Conn., and uses hedge fund
quantitative analysis to
develop there hedge fund
investing.
What Type of Investors Do
These Substantial Hedge
Funds Target?
 Insurance Wealthy
Pension Funds
Companies Individuals
Financial intermediaries A financial institution that Someone who possesses
which offer social provides coverage and a significant amount of
insurance by providing risk mitigation against financial resources,
income to the insured potential losses or assets, or net worth.
persons following their damages.
retirement.
Investor Type 1

What Are Endowments?

An endowment is donating money or property to a nonprofit organization, using the
resulting investment income for a desired purpose. Most endowments are devised to
keep the principal amount intact while utilizing the investment revenue for charitable
efforts.
Investor Type 1

What Is The Endowment Model?

The model relies on constructing a
diversified portfolio of investments with
low correlation to minimize risk and
optimize returns. The goal is to achieve
long-term capital growth through a
balanced and diversified investment
strategy. The endowment model often
focuses on taking advantage of the
potential benefits of alternative
investments and active management to
seek higher returns and manage volatility
over time. As an example, you have Yale's
endowment model on the right.
 How Do Endowments Invest?
Endowments invest in alternative investments using
secure funding from individuals, corporations, or
organizations through cash, securities, or valuable
assets to diversify their portfolio, reduce risk and
achieve higher returns. Harvard University's
endowment generated a 15.23% return between 1985
and 2008, while Yale's pulled in 16.62%, outperforming
the S&P 500, which only grew 12% during this time.
This demonstrates that endowments invested in
alternative investments have achieved significant
success. Among the top 5 endowments, today are
Harvard University (MA), Yale University (CT), Stanford
University (CA), Princeton University (NJ), and
Massachusetts Institute of Technology.
Investor Type 1
Why Do Endowments Invest In
Alternative Investments?
Endowments often opt for alternative investments because they behave differently than
traditional equity and bond investments. Alternative investments can help reduce volatility,
increase diversification, and improve returns, but some risks are involved. These risks include
low liquidity, high minimum investments, more complexity, and lower transparency and
regulation. Despite these challenges, endowments have found ways to overcome them and
achieve significant investment returns.
Why Are Alternative Investments
More Beneficial When Compared To A
Traditional Stock And Bond
Portfolio?
 This Is Why
Alternative investments offer lower risk, higher returns, and diversify a portfolio more
effectively than traditional stock and bond portfolios. Active management and skill-based
investing in alternative assets can generate alpha and outperform passive strategies. On the
other hand, traditional portfolios have limited diversification, market volatility, inflation risk,
lower returns, and a lack of unique opportunities, making them inferior to alternative
investments.
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