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Some Asset Managers Focus on “Alternative Investments”
Basic Definitions of different types of “Alternative Investments”:
“A pooled investment vehicle that generally meets the following criteria: (1) it is not marketed to the general public (i.e., it is privately-offered); (2) it is limited to high net worth individuals and institutions; (3) it is not registered as an investment company under relevant laws (e.g., U.S. Investment Company Act of 1940); (4) its assets are managed by a professional investment management firm that shares in the gains of the investment vehicle based on investment performance of the vehicle; and (5) it has periodic but restricted or limited investor redemption rights.”[1] Note recent changes in hedge fund marketing rules due to the “JOBS Act” approved by the SEC on July 10, 2013.
“A fund of hedge funds is an investment vehicle whose portfolio consists of shares in a number of hedge funds. The fund of funds strategy can be applied to any type of investment fund, from a mutual fund to a private equity fund. The fund of funds – which may also be called a collective investment or a multi-manager investment – simply holds a portfolio of other investment funds instead of investing directly in securities, such as stocks, bonds, commodities or derivatives.
“In its broadest sense, private equity is an ownership interest in a company or portion of a company that is not publicly owned, quoted or traded on a stock exchange. However, from an investment perspective, private equity generally refers to equity-related finance that is designed to bring about some sort of change in a private business, such as:
A fund investing in the real estate market – can include investment in several types of real estate including housing, hotels and commercial property. Real estate investments may be made using equity or debt
…products (futures contracts, physical commodities, ETFs, etc.) traded on an authorized commodity exchange. The types of commodities include agricultural products, metals, petroleum, foreign currencies and financial instruments and indexes…
Alternative Investments | Examples of Varied Strategies & Types of Investments. | ||||
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Hedge Funds |
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Private Equity |
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Real Estate |
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Commodities |
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Topic | Hedge Funds | Private Equity | |||
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Term: | Open-end term | Closed end.Typically minimum 10-12 years | |||
Initial Lock-up Period | Sometimes depending on strategy | Typically tied to realization of gains | |||
Type of Investment | Depending on strategy: e.g., equity long/short and global macro = short to medium term relatively liquid;Distressed credit = long term, illiquid | Multi-year, illiquid | |||
Investors’ Liquidity | Periodic redemptions as set by PPM /Subscription terms; typically with set lead-time notice (e.g., 65, 45, 30 day notices) with monthly, quarterly, semiannual, annual or other frequency; depending on investment strategy and PPM terms | Distributions made based on realization events; no scheduled redemptions; potential secondary sales possible at discount | |||
Capital Contributions | 100% of agreed investment on subscription date(s) | Subject to schedule of multi-year capital commitment calls | |||
Management Fees | 2% annual Management Fee based on “net asset value” (NAV) of fund/account xxx | 2% annual management fee based on capital called | |||
Performance Based Fees | 20% performance/incentive fee typically calculated annually on realized and unrealized gains over a hurdle rate; may or may not have provision for “clawback” in case of subsequent underperformance | 20% performance fee on realized investments and typically subject to a specified “hurdle rate” and “clawback” provisions based on future cumulative performance | |||
[1] Managed Funds Association (MFA), Hedge Fund Glossary: www.managedfunds.org/industry-resources/hedg-fundglossary/
[2] Bloomberg: July 10, 2013: http://www.bloomberg.com/news/2013-07-09/sec-set-to-lift-80-year-old-ban-on-advertising-by-hedge-funds.html
[3] BarclayHedge.com: Glossary : http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-fund-of-funds.html
[4] Blackrock Q&A: http://www2.blackrock.com/us/individual-investors/products-performance/alternative-investments/private-equity?cmp=alternatives&chn=PPC_Mobile&c=bing&kw=private%20equity
[5] Preqin Glossary: https://www.preqin.com/itemGlossary.aspx?pnl=QtoT
[6] National Futures Association Glossary: http://www.usafutures.com/commodityglossary.htm
[7] “Accredited Investor”: based on US Securities Act of 1933 as amended; generally, a natural person with net worth exceeding $1million or a charitable organization with total assets in excess of $5 million. See SEC full definition at: http://www.sec.gov/answers/accred.htm; “Qualified Purchaser”: based on Investment Company Act of 1940, as amended; Typically individual/family owning not less than $5 million in investments and company owning not less than $25million in investments., See SEC full definition (page 16): www.sec.gov/about /laws/ica40.pdf