One of the difficulties that institutions have when investing in alternatives is getting a handle on their definition. Are hedge funds, private equity, credit derivatives and other alternatives a separate asset class or a subset of an existing one? Do they hedge the investment opportunity set or expand it?
In most cases, alternatives are a subset of an existing asset class. Although this may run contrary to the conventional view, I take the position that what many consider separate "classes" are really just different investment strategies within an existing asset class. Additionally, in most cases, alternatives expand the investment opportunity set rather than hedge it. Last, alternative assets are generally purchased in the private markets, outside of any exchange.
Alternative assets typically derive their value from either the debt or equity markets. Most hedge fund strategies, for example, involve the purchase and sale of equity or debt securities. Hedge fund managers may also invest in derivative instruments whose value emanates ....