ISE Exam: Alternative Investments Deep Dive

Alternative Investments for ISE

Institutional investors allocate significantly to alternatives. Understanding these asset classes is crucial for the ISE exam.

Hedge Funds

Common Strategies

• Long/Short Equity: Long undervalued, short overvalued
• Global Macro: Based on macroeconomic themes
• Event-Driven: Mergers, restructurings, etc.
• Market Neutral: Zero net market exposure

Fee Structure

• Typically "2 and 20" (2% management, 20% performance)
• High water mark provisions
• Hurdle rates

Private Equity

Types

• Buyout: Acquire controlling stakes
• Venture Capital: Early-stage companies
• Growth Equity: Expansion capital
• Distressed: Troubled companies

Characteristics

• Illiquid, long-term commitments (10+ years)
• J-curve effect on returns
• Capital calls over time
• Active management of portfolio companies

Real Assets

Real Estate

• Direct ownership vs. REITs
• Core, value-add, opportunistic strategies
• Inflation hedge characteristics

Infrastructure

• Regulated utilities, toll roads, airports
• Stable, long-term cash flows
• Inflation protection features

Portfolio Role

• Diversification benefits
• Return enhancement potential
• Illiquidity premium
• Inflation protection

Due Diligence

• Manager selection critical
• Track record analysis
• Operational due diligence
• Fee analysis and alignment

Key Exam Topics

• Different alternative investment types
• Role in institutional portfolios
• Risk and return characteristics
• Due diligence considerations
• Fee structures