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Alternative Investments

See also Asset Allocation and Venture Capital.

     Alternative investment is a term typically used by investors to describe investments other than stocks and bonds. Strategies commonly classified as alternative investments include private equity, leveraged buy-out (LBO) funds, arbitrage strategies, hedge strategies, and "event driven" strategies. Some people also classify real estate and venture capital in the alternative investment category.

     The benefits of alternative investments include potentially higher returns, reduced volatility, diversification benefits resulting from low correlation with other investments, and in some cases more liquidity than some other investments like real estate and venture capital. Alternative investments are often considered by institutional investors as alternatives with potentially less risk than investments in venture capital, commercial real estate, distressed securities, and junk bonds. The drawbacks include potential one time losses from rare events and high management fees. While many institutional investors allocate a small single digit percentage of their assets to this class, some funds have been more aggressive and have achieved favorable returns from larger allocations to alternative investment.

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