Key Takeaways
- Alternative investments include hedge funds, private equity, venture capital, and commodities.
- Hedge funds use leverage, short selling, and derivatives for absolute returns.
- Accredited investor: $200K income ($300K with spouse) OR $1 million net worth (excluding primary residence).
- Holding Series 7, 65, or 82 licenses qualifies you as an accredited investor.
- Private equity invests in non-public companies with long holding periods (5-10 years).
- Hedge fund typical fee structure: '2 and 20' (2% management, 20% performance).
- Digital assets (cryptocurrency) are highly volatile and NOT insured by SIPC or FDIC.
- Alternative investments are generally illiquid and suitable only for sophisticated investors.
Last updated: December 2025
Alternative Investments
Alternative investments are non-traditional assets that don't fit into conventional stock, bond, and cash categories. They often provide diversification but come with unique risks.
Types of Alternative Investments
| Type | Description | Key Characteristics |
|---|---|---|
| Hedge Funds | Pooled investment using various strategies | Leverage, short selling, derivatives |
| Private Equity | Invest in private companies | Illiquid, long holding periods |
| Venture Capital | Fund startups and early-stage companies | High risk, potential high reward |
| Commodities | Physical goods (gold, oil, agriculture) | Inflation hedge, volatile |
| Real Assets | Real estate, infrastructure, timber | Income potential, illiquid |
| Digital Assets | Cryptocurrency, blockchain assets | Highly volatile, speculative |
Accredited Investor Requirements
Many alternative investments are only available to accredited investors. As of 2024-2025:
Individual Qualification
| Criteria | Threshold |
|---|---|
| Income Test | $200,000+ individual income for past 2 years (and expected this year) |
| Joint Income | $300,000+ combined with spouse for past 2 years |
| Net Worth | $1,000,000+ net worth (EXCLUDING primary residence) |
Professional Qualifications
| License/Credential | Accredited Status |
|---|---|
| Series 7 | Qualifies as accredited investor |
| Series 65 | Qualifies as accredited investor |
| Series 82 | Qualifies as accredited investor |
Entity Qualifications
| Entity Type | Requirement |
|---|---|
| Banks, Insurance Companies | Automatically qualified |
| Registered Investment Advisers | Automatically qualified |
| LLCs | $5 million+ in assets |
| Family Offices | $5 million+ in assets |
Exam Tip: Holding a Series 7, 65, or 82 license now qualifies you as an accredited investor. The Series 66 alone does NOT, but combined with Series 7, it would.
Hedge Funds
Hedge funds are private investment pools that use aggressive strategies to seek absolute returns (positive returns regardless of market direction).
Hedge Fund Characteristics
| Feature | Description |
|---|---|
| Investor Access | Limited to accredited/qualified investors |
| Minimum Investment | Typically $100,000 - $1,000,000+ |
| Regulation | Less regulated than mutual funds |
| Strategies | Long/short, leverage, derivatives |
| Liquidity | Often lock-up periods (1-3 years) |
| Redemptions | Limited (quarterly/annually) |
Common Hedge Fund Strategies
| Strategy | Description |
|---|---|
| Long/Short Equity | Buy undervalued, short overvalued stocks |
| Global Macro | Trade based on global economic trends |
| Event-Driven | Profit from mergers, bankruptcies, restructurings |
| Market Neutral | Equal long and short positions |
| Distressed Debt | Buy debt of troubled companies |
| Quantitative | Algorithm-based trading |
Fee Structure: "2 and 20"
| Fee Component | Amount |
|---|---|
| Management Fee | 2% of assets under management annually |
| Performance Fee | 20% of profits above hurdle rate |
| High-Water Mark | Performance fee only on NEW profits |
Example:
- Fund size: $100 million
- Annual return: 15%
- Management fee: $100M × 2% = $2 million
- Profit: $15 million
- Performance fee: $15M × 20% = $3 million
- Total fees: $5 million (5% of assets)
Private Equity
Private equity involves investing in companies that are NOT publicly traded.
Types of Private Equity
| Type | Focus |
|---|---|
| Buyout Funds | Acquire controlling stakes in mature companies |
| Growth Equity | Invest in growing companies for expansion |
| Venture Capital | Fund early-stage/startup companies |
| Mezzanine | Provide subordinated debt financing |
| Distressed | Invest in troubled companies |
Private Equity Characteristics
| Feature | Description |
|---|---|
| Holding Period | Typically 5-10 years |
| Liquidity | Very illiquid until exit |
| Structure | Usually limited partnership |
| Capital Calls | Investors commit, money drawn as needed |
| Exit Strategies | IPO, sale, recapitalization |
Venture Capital Stages
| Stage | Company Maturity |
|---|---|
| Seed | Concept/prototype stage |
| Early Stage | Product development, initial sales |
| Growth Stage | Scaling operations |
| Late Stage | Preparing for exit/IPO |
Commodities
Commodities are physical goods traded on global markets.
Types of Commodities
| Category | Examples |
|---|---|
| Precious Metals | Gold, silver, platinum |
| Energy | Oil, natural gas, coal |
| Agriculture | Corn, wheat, soybeans, coffee |
| Industrial Metals | Copper, aluminum, steel |
| Livestock | Cattle, hogs |
Ways to Invest in Commodities
| Method | Description |
|---|---|
| Physical Ownership | Buy actual commodity (gold bars) |
| Futures Contracts | Agree to buy/sell at future date |
| Commodity ETFs | Exchange-traded funds |
| ETNs | Exchange-traded notes |
| Commodity Stocks | Companies producing commodities |
| Managed Futures | Professional management |
Commodity Risks
| Risk | Description |
|---|---|
| Price Volatility | Wide price swings |
| No Income | Commodities don't pay dividends |
| Storage Costs | Physical commodities need storage |
| Contango | Futures may cost more than spot |
| Weather | Agricultural commodities affected |
| Geopolitical | Supply disruptions from conflicts |
Digital Assets
Digital assets include cryptocurrencies and blockchain-based assets.
Cryptocurrency Characteristics
| Feature | Description |
|---|---|
| Volatility | Extremely high price volatility |
| Regulation | Evolving regulatory environment |
| Custody | Unique storage/security challenges |
| Insurance | NOT covered by SIPC or FDIC |
| Valuation | No traditional valuation methods |
| 24/7 Trading | Markets never close |
Regulatory Considerations
| Aspect | Status |
|---|---|
| SEC Position | Many tokens are securities |
| Tax Treatment | Treated as property (capital gains) |
| Reporting | Required for gains and transactions |
| Fraud Risk | High incidence of fraud and scams |
Exam Tip: Digital assets (cryptocurrency) are NOT insured by SIPC or FDIC. They are highly speculative and suitable only for investors who can afford total loss.
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Suitability for Alternative Investments
Suitable Investor Profile
| Characteristic | Reason |
|---|---|
| Accredited Status | Required for most alternatives |
| High Net Worth | Can afford potential total loss |
| Long Time Horizon | 5-10+ year holding periods |
| No Liquidity Needs | Cannot easily access funds |
| Sophisticated | Understands complex risks |
| Diversified | Alternatives are one piece of portfolio |
NOT Suitable For
| Investor Type | Reason |
|---|---|
| Retirement Accounts | Liquidity concerns, complexity |
| Income-Focused | Most alternatives don't generate income |
| Risk-Averse | High volatility and loss potential |
| Short-Term Goals | Long lock-up periods |
| Unsophisticated | Difficult to understand risks |
Test Your Knowledge
Which of the following qualifies an individual as an accredited investor?
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B
C
D
Test Your Knowledge
What is the typical hedge fund fee structure known as "2 and 20"?
A
B
C
D
Test Your Knowledge
Which of the following is NOT typically a characteristic of hedge funds?
A
B
C
D
Test Your Knowledge
Digital assets like cryptocurrency are:
A
B
C
D
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