Professional money management can take many different forms. Alternative management is a corner of the field of investment management, and it encompasses different types of investment vehicles. Many large institutional investors, including endowments, pension funds and corporations, rely on alternative management to drive returns that are better than those of more traditional investments. Alternative money management is non-traditional, unlike the management of a stock or bond portfolio. Instead, these investment professionals oversee non-traditional securities and investment vehicles, such as hedge funds, private equity and real estate, and they earn fees based on the success of their management style.
Alternative management can be a lucrative career, albeit a high-pressure one. Fees in this category of investment management are higher than in traditional asset classes and can include one layer for management and a second based on the performance of the fund. If an alternative manager fails to produce consecutively higher profits or at least beat the general market performance, the second layer of fees can be waived.
In alternative management, there are different categories of investment types. A hedge fund is a lightly regulated investment fund with combined assets from many investors, including large financial institutions and wealth individuals. Hedge fund managers can trade traditional assets but apply complex strategies to those investments, such as betting that a stock will decline in value.
Private equity is another form of alternative management. It is a business that builds portfolios by acquiring assets and entire companies, holding them for a period of five to seven years while attempting to improve upon the business, then selling the assets or entity for a profit. Often, these portfolio managers have some type of expertise in the types of companies that are acquired, such as retail. Private equity management has a hand in the management of the acquired company and in turning a struggling company around, so this is where knowledge of the industry comes into play.
Real estate also is under the alternative management umbrella. The fund managers involved in real estate either buy property and assets directly or they invest via an index fund, known as a real estate investment trust (REIT), which is an index fund comprised of many real estate securities and commercial properties. An REIT trades in the stock market, similar to an individual stock. Alternative managers can buy and sell REITs more easily than physical real estate assets can be bought and sold.