Coming to Terms With Alternative Investing

Alternative investments come in many forms, from global hedge funds to energy partnerships. Here is a glossary of some alternative investments that are commonly used by non-profit organizations:

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Arbitrage

A strategy that involves buying a security in one market and then simultaneously selling it or an equivalent in another market, profiting on the small price difference between the two transactions. Arbitrage investments sometimes are made through funds, and arbitrage deals can take many forms. For example, “event arbitrage” deals are pegged to a specific occurrence, such as a corporate merger that can push up the value of a stock in a short period of time.

Buyout Funds

Pools of money from a variety of investors that are used to buy an ownership stake, and sometimes majority control, in a public or private company. The company may be a division of a larger corporation or an enterprise that has gone through financial difficulties but whose products or services remain in demand. These investments typically are not easily sold in the open market and usually require a commitment of 5 to 15 years.

Distressed-Debt Funds

Pools of money from a variety of sources that are used to buy the debt obligations of companies that are going through financial problems. Typically, the companies have a sound product or service but may be in a financial pinch because they borrowed too much money or they must deal with a one-time business disruption. Investors buy the debt obligations at a discount from a bank or other lender, then make a profit when the company gets back on its feet.

Hedge Funds

Pools of money that are used to purchase securities on both sides of a market risk. High-risk hedge funds borrow heavily to place big bets on the direction of the market. Some less-risky hedge funds strive for a “market neutral” strategy in which investment managers try to balance the potential losses in one group of stocks with gains in another. For example, a hedge-fund manager might bet part of investors’ money on a group of stocks he thinks will go up in the long term. But to balance the risk, he may also use a technique called “short selling” that allows him to “borrow” a second group of stocks through a broker, sell them, and repurchase them later at a lower price. The hedge fund profits if the stocks in the second group sell for less than what they were “borrowed” for. But if the stocks rise in price, the hedge fund will lose money on the investment. Hedge funds charge stiff fees, typically 1 per cent of the assets invested plus a 20-per-cent cut of profits.

Hedge Funds of Funds

Funds designed to reduce risk by dividing investors’ money among a variety of hedge-fund managers.

Oil-and-Gas Partnerships

Investments in the exploration of oil and/or gas reserves or in the development of reserves that are known to exist. These investments typically are not easily sold in the open market and usually require a commitment of 5 to 15 years.

Real-Estate Investment Trusts

Pooled arrangements that invest in a wide variety of properties, such as offices, apartments, and warehouses. By purchasing shares, investors have less risk than they would incur by directly owning a single building or piece of land.

Timber Partnerships

Investments in land that contains harvestable timber. These investments typically are not easily sold in the open market and usually require a commitment of 5 to 15 years.

Venture-Capital Funds

Pools of money from a variety of investors that are used to buy an ownership stake in companies that are just starting out or that are in the early stages of growth. These investments typically are not easily sold in the open market and usually require a commitment of 5 to 15 years.