Introduction to Alternative Investments
What investments are alternative investments?
Alternative investment is a catch-all term that encompasses all investments except stocks; bonds; or cash (or a mutual fund or ETF that holds one of those three). Examples include derivatives, hedge funds, commodities, and private equity, but there are many more.
Is real estate an alternative investment?
It depends on how you invest in the real estate. If you hold shares in a publicly traded real estate investment trusts (REITs), then it is not, as REITs are like stocks from an investment perspective. However if you hold real estate directly by yourself or through another type of real estate partnership then it is an alternative investment.
Is cryptocurrency an alternative investment?
Yes, cryptocurrency is an alternative investment.
Why are alternative investments risky?
Alternative investments tend to be risky for a few main reasons: they are complex, there is often little publicly available information about them so you have less ability to make informed decisions, and they can be more volatile.
Synthetic Collateralized Debt Obligation (CDO)
A synthetic CDO is an investment product that, rather than combining income from normal debt products such as bonds into securities, combines income from derivatives such as credit default swaps (CDS) into securities. They are usually divided up into tranches, which are portions of the pool of investments divided by risk.
Bespoke Collateralized Debt Obligation (CDO)
A bespoke CDO is a one that is created for a single investor or group of investors who will buy all, or a single tranche of it. When a single tranche is sold, the remaining tranches are often held by the dealer.
A dark pool is a securities exchange mainly used to help facilitate large trades by institutional investors called block trades. This is done in order to avoid having these trades affect the price of the stock they are trading, which would increase trading costs.
Swap Execution Facility (SEF)
A SEF is a trading platform that allows people to buy and sell swaps. It operates similarly to how stocks are bought and sold on an exchange.
Master Limited Partnership (MLP)
An MLP is a business legally structured as a limited partnership that is publicly traded. They have tax benefits compared to a C corporation structure, but only companies in certain industries, usually natural resources of some kind or real estate, can use this structure.
A nonfinancial asset is something the value of which comes from its physical traits, rather than a contractual claim such as the contract of a bond issuer to pay back a bondholder the value of the bond plus interest. Examples of nonfinancial assets include real estate, art, and vehicles.
A collectible is an object that is worth a significantly greater amount of money than a normal object of its type due to its rarity or popularity. Examples include coins, comic books, stamps or antiques.
Exchange Traded Derivative
An exchange traded derivative is any type of derivative that is traded on a financial exchange. This contrasts with derivatives traded over-the-counter (OTC).