Brailsford3eSM_Ch18 - Chapter 18 Alternative investment...

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Copyright © 2006 Nelson Australia Pty Limited Chapter 18 Alternative investment classes Learning objectives After the completion of this chapter, you should be able to: describe the features of the main groups of investments known as the alternative investment asset class compare the characteristics and attributes of alternative investments to those of traditional asset classes appreciate that the fundamental concepts and principles of investment apply to alternative investments comprehend the arguments in favour of including alternative investments as part of an overall portfolio strategy discuss the issues, which are associated with the interaction between professional fund managers and their investors, that arise from the agency relationship, such as dilution of control and fee structures understand the available evidence in relation to the return and risk characteristics of alternative investments Key points 1 Alternative investments claimed to offer something different than other investments. . 2 Alternative investments typically involve higher fees, illiquidity, greater ‘risk’ of failure and barriers to entry. The evidence does not necessarily support superior returns. Chapter outline 18.1 Introduction 1 The main forms of alternative investments include private equity, venture capital and hedge funds. 2 Claimed to provide superior returns, a superior risk-return trade-off, or to generally enhance a portfolio. 18.2 Private equity 1 Private equity results from company’s capital requirement for business concepts. 2 Characteristics include a small group of investors, not necessarily available to the public and common in early stages of a business. 3 Private equity life cycle consists of a business concept, angel investor (ie. business angel), business structure, venture capital, IPO, and finally public equity.
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2 Investments: Concepts and Applications Solutions Manual Copyright © 2006 Nelson Australia Pty Limited 18.3 Venture capital 1 Venture capital is a sub-set of private equity. Venture capital funds specialise in private equity investments, and provide enhanced access to investors to private equity. 2 Venture capital works with the business to get it to exit, which is typically through an IPO exit strategy. 18.4 Hedge funds 1 General view is hedge funds avoid losses, hence the term hedge fund. 2 Hedge funds characteristics are levered positions, focus on absolute rather than relative returns. These funds have low correlations with traditional portfolios and may involve the use of derivative instruments. Solutions to text problems Problems and applications 1 Investors and fund managers are always looking for new investments. They seek investments that provide either superior risk-return profiles or new opportunities that expand their investment set. Alternative investments represent an asset class that is believed to offer these advantages. Further, it is argued that their return distributions have low correlations
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This note was uploaded on 02/06/2011 for the course FINM 3402 at Queensland.

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Brailsford3eSM_Ch18 - Chapter 18 Alternative investment...

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