Alternative Investments: CAIA Level I, 3rd Edition

CHAPTER 1 What Is an Alternative Investment?

Definitions of what constitutes an alternative investment vary considerably. One reason for these differences lies in the purposes for which the definitions are being used. But definitions also vary because alternative investing is largely a new field for which consensus has not emerged, as well as a rapidly changing field for which consensus will probably always remain elusive.

Analyzing these various definitions provides a useful starting point to understanding alternative investments. So we begin this introductory chapter by examining commonly used methods of defining alternative investments.

1.1 Alternative Investments by Exclusion

Alternative investments are sometimes viewed as including any investment that is not simply a long position in traditional investments. Typically, traditional investments include publicly traded equities, fixed-income securities, and cash. For example, if a particular investment (such as private equity) is not commonly covered as equity in books on investing, then many people would view it as an alternative investment.

The alternative-investments-by-exclusion definition is overly broad for the purposes of the CAIA curriculum. First, the term investment covers a very broad spectrum. A good definition of an investment is that it is deferred consumption. Any net outlay of cash made with the prospect of receiving future benefits might be considered an investment. So investments can range from planting ...