Alternative Investments Scope and Risks: Why Liquidity Cost Matters?

The only condition is one!!! Alternative investments mean 'nontraditional assets'.

It means looking beyond stocks and bonds.

It is a core pillar of portfolio diversification.

Retail investor: "Does alternative investing always mean high returns?"

No, it does not. Risks and liquidity costs follow.

What exactly do alternative investments include?

Private equity, real estate, infrastructure, private credit, hedge funds, commodities, and art are representative.

Private equity → invests in unlisted companies aiming for returns via operational improvement.

Real estate investing → invests directly in commercial or residential properties or participates through funds.

Hedge strategies → pursue diversified return sources like market neutral and long-short.

Why does it matter?

When market volatility is high, low correlation with traditional assets provides a defensive role.

Long-term capital such as pensions can receive a liquidity premium.

However, high management costs and entry barriers make it hard for individuals to replicate directly.

Common misconception 1, guaranteed high returns?

High returns and high liquidity are separate.

If private equity returns are large, the exit period is long and capital is tied up.

Example calculation (hypothetical):

If you invest 100 million won in Private Equity A and receive 170 million won in total after 5 years,

the IRR is about 11.2% per year, but withdrawals are not possible for 5 years.

Liquidity cost → the later the cashing out, the lower the effective return can be.

Common misconception 2, private equity is safe?

Private equity has less disclosure and supervision, so information asymmetry is large.

Operational failure or increased leverage can magnify losses.

Risk management and manager credibility determine success or failure.

Risk characteristics, key points

Liquidity risk → low convertibility to cash, requires long investment period.

Concentration risk → performance can hinge on a single large deal.

Leverage risk → borrowing amplifies gains and also amplifies losses.

Lack of transparency → information may arrive late or be insufficient.

So, where to start

→ 1. Set investment objective and horizon first, short-term funds are not recommended.

→ 2. Verify manager, track record, and fee structure in documents, ask about any unclear clauses.

→ 3. Decide the allocation to alternatives in your portfolio and set a liquidity buffer, secure a safety margin relative to living expenses.

This is for reference only.

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※ This article is for information only and is not investment solicitation.
※ Investment decisions and responsibility lie with the investor.
※ Figures are as of the time of writing and may change.