NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesMedium
A client with a high net worth and significant investment experience is interested in alternative investments to diversify their portfolio and potentially enhance returns. They are comfortable with illiquidity and complex structures. Which of the following would be an appropriate alternative investment for this client?
- AA highly liquid, short-term government bond ETF.
- BA money market mutual fund.
- CA private equity fund investing in venture capital.
- DA publicly traded large-cap equity mutual fund.
Show answer & explanationAnswer & explanation
Correct answer: C. A private equity fund investing in venture capital.
Private equity funds, especially those investing in venture capital, are classic alternative investments characterized by illiquidity, higher risk, and the potential for enhanced returns, making them suitable for sophisticated investors with high net worth and tolerance for complexity and illiquidity.
Why the other options are wrong
- A. This is a traditional fixed-income investment, known for high liquidity and low risk, not an alternative investment.
- B. A money market fund is a cash equivalent, known for high liquidity and very low risk, not an alternative investment.
- D. This is a traditional public market investment, not an alternative investment, and offers high liquidity.
Alternative Investments
Investments other than traditional stocks, bonds, and cash, often characterized by illiquidity, less regulation, and potential for higher returns or diversification benefits.
- Include private equity, hedge funds, real estate, commodities.
- Typically require a sophisticated investor.
- Offer diversification benefits.
- Often have higher fees and less transparency.
Memory trick: Alternatives: Unlock unique paths beyond stocks and bonds.