There are two mainstream classification methods: one divides alternative investments into alternative strategies and alternative assets, such as BlackRock; Another asset can be divided into three categories according to its risk-return characteristics: absolute return (hedge fund), private equity and physical assets, such as California public pension.
In China's book, "alternative investment" refers to investment types other than equity assets, fixed income assets and monetary assets traded in the traditional open market, including private equity (PE), real estate and shops, mining and energy, commodities (such as gold and carbon emission rights), infrastructure, hedge funds, venture capital (VC), art and collectible investment.
Broadly speaking, China's non-standard, stock matching, offline innovation and bill arbitrage can all be regarded as alternative investments.
A fundamental idea of alternative investment operation is that the market is not necessarily efficient, and the prices of many enterprises and projects do not reflect their intrinsic value, so the farther away from the public trading platform, the higher the deviation between price and value may be. Alternative investment focuses on unlisted enterprises and projects with packaging potential, and reflects the value of the acquired enterprises or projects through purchase, reorganization, packaging and liquidation.
The advantages of alternative investment are as follows
Investors bring alternative investment products into the portfolio and improve the return on investment through the diversification of the portfolio;
In the era of multi-asset allocation, investors constantly adjust their investment portfolios according to the changes in the macro-market environment, giving investors more choices;
Adding alternative investment products to a diversified portfolio may get higher returns than the traditional stock and bond portfolio;
Because of the low correlation between alternative investment products and traditional securities investment products, investors can diversify their investment risks through alternative investment products.
Disadvantages of alternative investment
Lack of supervision and information transparency
Managers of alternative investments will not disclose the information of holding alternative investment products, and the information related to alternative investment products that investors can obtain will also be limited.
Alternative investment products are illiquid and take a long time to get returns. It is usually only necessary to report the changes of net assets to investors on a monthly or quarterly basis, so it is more difficult for individual investors to obtain important information about the market changes of alternative investment products than institutional investors, which can also explain why institutional investors prefer alternative investment products than individual investors.
Poor liquidity and high leverage ratio
Because it does not operate on an open trading platform, a major feature of alternative investment is the lack of liquidity.
A project usually takes several years from subscription to cash, so alternative investment funds generally have a lock-up period of 5, 10 years, and it is difficult to redeem them halfway.
Different from traditional investment products, alternative investment products are difficult to sell quickly without losses.
Most alternative investment products operate in a highly leveraged mode, so when alternative investment is successful, investors can get a high rate of return; But when it fails, the loss of investors is very large.
Valuation is difficult, and it is difficult to accurately evaluate the value of assets.
The prices of most alternative investment products are based on valuation. Valuation refers to the process of evaluating asset prices based on a series of assumptions. Sometimes the problem of poor liquidity of alternative investment products may also lead to inaccurate valuation, and it will be difficult for the market to reflect the true value of alternative investment projects in time.
After a period of accumulation, alternative investment has gradually become less alternative in China, and more and more financial institutions have begun to lay out alternative investments to spread risks and improve returns.