In a previous article, we introduced the
CFA Institute Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7
modules, covering all the essential topics in finance, economics, ethics and
regulations. This series of articles
will highlight the core knowledge of each chapter.
Chapter 12 provides an overview of alternative
investments. The learning outcome of chapter 12 is as follows:
·
Describe
advantages and limitations of alternative investments;
·
Describe
private equity investments;
·
Describe
real estate investments;
·
Describe
commodity investments.
Real estate investments take different forms. For
many people, it is the purchase of their home, which may be a significant
portion of their net worth. Houses, apartments, and other residential
properties that are owner occupied are indeed the foundation of many
individuals’ financial plans. However, although considered part of their
financial plan, most residential real estate is not included in individuals’
investment portfolios.
Generally, residential real estate
transactions involve owner-occupiers (that is, people who live in the home they
own), and are made for personal reasons as opposed to purely investment-related
reasons. Individuals or groups of individuals may invest in residential real
estate for investment-related purposes, such as renting out holiday homes.
Many investors focus their real estate
investments on what is commonly referred to as commercial real estate—that is,
income-generating real estate. As illustrated in the following table, the
majority of commercial real estate in terms of value is concentrated in a small
number of countries.
Commercial real estate segments include
land, offices, multifamily residential dwellings, retail and industrial
properties, and hotels.
Investors can buy real estate directly
or gain exposure to real estate through the private market via real estate
limited partnerships and real estate equity funds, or through the public market
via real estate investment trusts.
Commodities, such as precious and base metals,
energy products, and agricultural products, tend to rise in price with
inflation. So, they can provide inflation protection in a portfolio.
There are several ways for investors to
gain exposure to commodities. They can buy
·
the
physical commodity,
·
shares
of natural resources or commodity-related companies, or
·
commodity
derivatives.
Purchase of the physical commodity. Theoretically, an investor could buy a
barrel of oil or a head of cattle or a bushel of wheat. But the transportation
and storage difficulties associated with purchasing a physical commodity means
that it is rare for investors to gain access to commodities this way.
Purchase of shares of natural resources
or commodity-related companies.
Investors can buy shares of companies that have a major portion of their
operations in the exploration, recovery, production, and processing of
commodities. For example, an investor who wants exposure to oil may buy shares
in a major oil company, such as BP, Eni, ExxonMobil, Petrobras, PetroChina,
Statoil, or Total.
Purchase of commodity derivatives. As mentioned in the Derivatives
chapter, investors can buy derivatives in which the underlying asset is a
commodity or a commodity index. Typical commodity derivatives are forwards,
futures, options, and swaps. Recall that futures and some types of options are
traded on exchanges, whereas forwards, swaps, and other types of options are
privately negotiated agreements.
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