What is an Alternative Investment?

Posted by: Kaplan Schweser
Published: October 31, 2016

The Chartered Alternative Investment Analyst^SM (CAIA^®) Charter is a globally recognized credential for finance professionals managing, analyzing, distributing, or regulating alternative investments. According to CAIA Association, there is an elite group of 9,000 Charterholders worldwide. To better understand if the CAIA Charter is right for you, it’s important that we first define alternative investment.

There are four categories of alternative assets you must be familiar with for the CAIA exam: real assets, hedge funds, private equity, and structured products.

1. Real assets are associated with investments that directly control nonfinancial assets and represent actual rights to consumption. Within real assets, investors may invest in real estate, infrastructure, natural resources, commodities, and intangible assets.

2. Hedge funds are private investment vehicles that are subject to minimal regulation and therefore able to pursue unique investment opportunities using derivatives, leverage, short positions, and other strategies.

3. Private equity investments include debt and equity securities that are not publicly traded. Within private equity, investors may invest in:

• Venture capital: senior equity financing for small, high-risk startup companies unable to obtain public equity
• Leveraged buyouts: funds that privatize a public company by purchasing its equity using a large amount of debt
• Mezzanine debt: privately held convertible debt, debt with equity options or warrants, and preferred stock
• Distressed debt: debt issued by companies in, or about to enter, bankruptcy

4. Structured products, such as collateralized debt obligations (CDOs) and credit derivatives, create a specific risk, return, tax, or other profile by segmenting the cash flows of traditional investments or linking the returns to one or more market values.

Now that you understand the different categories of alternative investments, learn why finance professionals worldwide choose to pursue the CAIA designation.