Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

What are Alternative Investments?

Alternative investments is a term used to describe nontraditional asset classes. Traditional asset classes include stocks, bonds, commodities, and foreign exchange. Alternative investments include real estate funds, private equity, venture capital, managed futures funds, hedge funds, and sometimes products that invest in hard assets such as timber, land, or artwork.

The more established and better understood traditional asset classes are best described as having large global markets, significant pools of liquidity, and a high degree of price transparency, regulation, and established market microstructures. Mutual funds have been around in various shapes and sizes for well over 100 years, whereas alternatives and hedge funds, by even the broadest measures, started in the late 1960s and really only began to grow in the early 1990s.

Alternative investing is not a mature industry. Alternative investments are considered relatively young in terms of life cycle and track records. Hedge funds are perhaps the newest form of alternatives and as such may also be the least understood. Their business models are also not as stable, well developed, or mature as those associated with traditional investing or even earlier forms of alternatives, such as real estate and private equity. Today, there are over $10 trillion of investments in traditional stock and bond mutual funds in the United States and over $25 trillion globally, as compared to just over $2 trillion ...