Alternative Investments: Benefits, Risks, and Structure

Chapter 20 introduces alternative investments by explaining why they exist, what benefits and risks they bring, and how alternative structures are made available to investors. It also clarifies how alternative mutual funds differ from conventional mutual funds and from hedge funds.

Students should approach this chapter through liquidity, leverage, transparency, and access. Those four themes explain why alternatives can diversify a portfolio but also create suitability concerns that do not arise in the same way with conventional products.

Exam Focus

• Compare the diversification case for alternatives with the added risks created by leverage, opacity, valuation difficulty, and liquidity limits.
• Distinguish alternative investment structures by legal form, access route, and investor eligibility.
• Separate alternative mutual funds from hedge funds by regulation, permitted strategies, and retail suitability.

In this section

• Alternative Investments Overview
  What alternative investments are, how the alternative investment universe is grouped, and why strategy and structure are not the same thing.
• Benefits and Risks of Alternative Investments
  Why investors use alternative investments and diversification, alpha, liquidity, leverage, and operational risks shape the decision.
• Alternative Investment Structures
  The main structural features of hedge funds, alternative mutual funds, funds of hedge funds, and ETFs in the Canadian market.
• Alternative Mutual Funds versus Conventional Funds and Hedge Funds
  Comparison of current Canadian alternative mutual funds with conventional mutual funds and hedge funds on regulation, strategy flexibility, liquidity, transparency, fees, and investor access.