Subject 6. Risk management overview

Managing risks associated with alternative investments can be challenging because these investments are often characterized by asymmetric risk and return profiles, limited transparency, and illiquidity.

Traditional risk and return measures such as mean return, standard deviation of returns, and beta may not provide an adequate picture of characteristics of alternative investments. Moreover, these measures may not be reliable or representative of specific investments.

Operational, financial, counterparty, and liquidity risks may be key considerations for those investing in alternative investments.

It is critical to do due diligence to assess whether (a) a potential investment is in compliance with its prospectus; (b) the appropriate organizational structure and policies for managing investments, operations, risk, and compliance are in place; and (c) the fund terms appear reasonable.

The inclusion of alternative investments in a portfolio, including the amounts to allocate, should be considered in the context of an investor's risk-return objectives, constraints, and preferences.

User Contributed Comments 3

You need to log in first to add your comment.
abod2: The Key Risk Considerations for investing in alternative investments can be remembered through: "FOCaL" i.e. Financial, Operational, Counterparty, and Liquidity risks!
murphynan: @abod2 I like this one !!
nmech1984: CFA L1... THE END!!!