NISM Series XIX-A · Chapter 1: Overview of Alternative Investments

L1 · Foundation

Foundation — What alternative investments are, and the avenues they cover

Why alternative investments have no uniform classification and are defined by what they are not; the three-column comparison of traditional, alternative and dual investments and the liquidity test that separates them; the SEBI definition of an AIF as a privately pooled investment vehicle and the three categories expressly excluded; who invests in AIFs internationally; and the avenues — venture capital with the DPIIT start-up definition, private equity with buyouts, LBOs and mezzanine capital, real estate and infrastructure with REITs and InvITs, commodities, derivatives, and the three features that mark out a hedge fund.

21 min read · Worth 5% of the paper · Written from pages 14–27 of the official NISM workbook · Updated 18 September 2026

What makes an investment "alternative"

1. A definition by exclusion

In plain words: there is no fixed list of what counts as "alternative". Most sources define it by what it is not. Stocks, bonds and cash are the usual kinds. Anything outside them is alternative.

⚠️ "Globally, alternative investment industry EVOLVED OVER TIME, HENCE THERE IS NO UNIFORM CLASSIFICATION OR LIMITATION TO WHAT CONSTITUTES SUCH ASSETS. Alternative investments are therefore DEFINED GENERALLY BY SEVERAL SOURCES AS INVESTMENTS OTHER THAN TRADITIONAL INVESTMENTS".

⚠️ The Investopedia definition the workbook quotes: "AN ALTERNATIVE INVESTMENT IS A FINANCIAL ASSET THAT DOES NOT FALL INTO ONE OF THE CONVENTIONAL INVESTMENT CATEGORIES. CONVENTIONAL CATEGORIES INCLUDE STOCKS, BONDS, AND CASH".

⚠️ What "traditional" covers: "Traditional investments (AS DISTINGUISHED FROM SAVINGS IN BANK DEPOSITS, GOVERNMENT SCHEMES, ORNAMENTAL GOLD AND RESIDENTIAL PROPERTY FOR LIVING PURPOSES) ARE CONFINED TO THE DOMAIN OF FINANCIAL SECURITIES SUCH AS STOCKS AND BONDS FROM PRIMARY AND SECONDARY CAPITAL MARKET, PURCHASE OF GENERAL CATEGORIES OF MUTUAL FUND UNITS AND EXCHANGE TRADED FUNDS".

So "traditional" here means shares, bonds, mutual fund units and ETFs. Bank deposits, government schemes, gold jewellery and the house you live in are savings. They are kept out of the comparison.

⚠️ "Unlike traditional investments, alternative investments are ABOUT INVESTING IN OPPORTUNITIES THAT CAN POTENTIALLY GENERATE HIGHER RETURNS BUT ENTAIL HIGHER RISK-TAKING AS WELL... Alternative investments are meant TO COMPLEMENT TRADITIONAL INVESTMENTS FOR SUCH INVESTORS BY IMPROVING THEIR RISK-ADJUSTED RETURNS OVER THE LONG TERM".

Put simply, the aim is not to replace shares and bonds. The aim is to add something that may earn more, for more risk, so the whole mix does better over many years.

2. Traditional, Alternative and Dual

⚠️ TRADITIONAL	⚠️ ALTERNATIVE	⚠️ DUAL
⚠️ PUBLIC EQUITIES — listed stock	⚠️ PRIVATE EQUITY — direct investments in unlisted stock (privately held companies)	⚠️ CLOSED ENDED DEBT FUNDS WITH ILLIQUID ASSETS such as real estate exposures
⚠️ LISTED DEBT SECURITIES issued by both listed and unlisted companies	⚠️ DIRECT INVESTMENT IN UNLISTED (RATED OR UNRATED) DEBT SECURITIES OR LOAN CAPITAL	⚠️ EXCHANGE TRADED STABLE AND PREDICTABLE CASH FLOW INSTRUMENTS such as SECURITY RECEIPTS issued by securitisation companies, SPVs and ASSET RECONSTRUCTION COMPANIES
⚠️ OPEN ENDED MUTUAL FUNDS offering equity, debt or balanced exposures	⚠️ DIRECT INVESTMENTS IN REAL ESTATE AND INFRASTRUCTURE DEVELOPMENT PROJECT SPVs	⚠️ UNITS ISSUED BY REITs AND InvITs offering stable cash flow and rating
⚠️ EXCHANGE TRADED SIMPLE DERIVATIVE INSTRUMENTS such as futures and options used to manage portfolio risk on equities	⚠️ DIRECT INVESTMENT IN COMMODITIES	⚠️ MUTUAL FUNDS WITH ALTERNATIVE OR CONTRARIAN STRATEGIES that entail higher risk taking
⚠️ EXCHANGE TRADED FUNDS (ETFs)	⚠️ HEDGE FUNDS, COMPLEX STRUCTURED PRODUCTS AND DERIVATIVES such as COLLATERALISED DEBT OBLIGATIONS and OVER-THE-COUNTER DERIVATIVES
	⚠️ DISTRESSED ASSET FUNDS "that finance or acquire companies in financial distress" and funds investing in SPECIAL SITUATIONS "such as MERGERS & ACQUISITIONS / HOSTILE ACQUISITIONS / RESTRUCTURING"

2.1 The dividing line is liquidity

Liquidity means how fast you can turn an asset into cash. That one idea sorts the three columns.

That is the whole logic of the three columns. A REIT holds buildings, which are as illiquid as an asset can be — but the unit trades on an exchange. The asset is alternative; the instrument is traditional. Hence "dual".

3. The SEBI definition of an AIF

The short version: an AIF is a private pool of money. It raises funds from chosen investors, in India or abroad, and invests them under a set policy.

⚠️ "The words 'PRIVATELY POOLED' DENOTE THAT THE FUND IS POOLED FROM SELECT INVESTORS AND NOT FROM THE GENERAL PUBLIC AT LARGE. These private investors are sourced from categories such as INSTITUTIONS AND HNIs WHO CAN UNDERSTAND THE NUANCES OF HIGHER RISK TAKING AND COMPLEX INVESTMENT ARRANGEMENTS".

It is not open to the general public. It is meant for institutions and rich investors who can judge complex, risky deals.

⚠️ Three categories are EXPLICITLY EXCLUDED:

⚠️ "ANY FUND WHICH IS A MUTUAL FUND OR A COLLECTIVE INVESTMENT SCHEME AS PER SEBI REGULATIONS"
⚠️ "FAMILY TRUSTS, ESOP OR OTHER SUCH EMPLOYEE BENEFIT TRUSTS, HOLDING COMPANIES, SPVs SET UP FOR SECURITISATION OR OTHER SUCH PURPOSES"
⚠️ "FUNDS SET UP UNDER RBI REGULATIONS SUCH AS SECURITISATION COMPANIES OR UNDER THE PURVIEW OF ANY OTHER REGULATOR"

⚠️ Who invests: "Internationally, the investors in an AIF are primarily LARGE INSTITUTIONAL FUNDS SUCH AS PENSION FUNDS, INVESTMENT FUNDS, INSURANCE COMPANIES, ENDOWMENT FUNDS, INVESTMENT BANKS, FAMILY OFFICES AND HNIs, FUND OF FUNDS AND AIF MANAGERS THEMSELVES".

4. The alternative investment avenues

4.1 Venture Capital

Venture capital backs young firms. Think of a start-up with a new product, a new service or a new way of doing business.

⚠️ "Venture capital investing is about DIRECT INVESTMENT IN INFANT COMPANIES WITH BUSINESSES THAT ARE YET TO GROW OR EVOLVE COMPLETELY. These businesses are also known as START-UPS OR 'EARLY STAGE' BUSINESSES".

⚠️ "AIF Regulations state that these are concerned with NEW PRODUCTS, NEW SERVICES, TECHNOLOGY OR INTELLECTUAL PROPERTY BASED ACTIVITIES OR A NEW BUSINESS MODEL".

4.2 Private Equity

Private equity is money put straight into firms that are not listed. The firm raises it from outside investors, not from the stock market.

⚠️ "The term 'PRIVATE EQUITY' has wider import and is a GENERIC TERM USED FOR DIRECT INVESTMENTS IN COMPANIES THAT ARE NOT LISTED ON A STOCK EXCHANGE... it is EQUITY CAPITAL RAISED BY COMPANIES FROM EXTERNAL INVESTORS WITHOUT ACCESSING PUBLIC EQUITY MARKETS".

⚠️ "Private equity also participates in more complex transactions involving CONTROL ACQUISITIONS (KNOWN AS 'BUYOUT') AND LEVERAGED BUY OUTS (LBOs) WHICH COMPRISE OF DOING BUYOUTS WITH SIGNIFICANT LEVERAGE. In such transactions, investors typically look to ACQUIRE CONTROLLING INTERESTS OF EITHER 51% OR MORE OF THE SHARE CAPITAL OR VOTING RIGHTS OF A TARGET COMPANY".

⚠️ "MEZZANINE CAPITAL REFERS TO FUNDS THAT ARE PROVIDED IN A HYBRID STRUCTURE INVOLVING THE FEATURES OF BOTH DEBT AND EQUITY CAPITAL".

⚠️ "The SEBI (AIF) Regulations DIFFERENTIATE BETWEEN PRIVATE EQUITY FUNDS AND PURE DEBT FUNDS".

4.3 Real Estate and Infrastructure

Here the money goes into property firms, big projects or funds that finance them. The risk comes from the sector itself and from the long wait before a project pays.

⚠️ "Investment can be made INTO PROPERTY DEVELOPMENT COMPANIES OR SPECIFIC PROJECTS... These include investment in REAL ESTATE FUNDS THAT FINANCE BIG TICKET PROJECTS. Such investments entail CONSIDERABLE MARKET RISK ASSOCIATED WITH THE SECTOR OR ILLIQUIDITY RISK DUE TO LONG GESTATION PERIOD".

⚠️ REITs: "SECURITIES THAT ENTITLE THE HOLDERS TO UNDERLYING CASH FLOW GENERATED FROM RENT YIELDING PROPERTIES", offering "THE ADVANTAGE OF INVESTING IN THE SECTOR WITHOUT PHYSICALLY HOLDING REAL ESTATE ASSETS. SINCE REITs ARE LIQUID DUE TO THEIR LISTED STATUS, THEY ARE SOMETIMES CONSIDERED EITHER TRADITIONAL ASSETS OR IN THE DUAL CATEGORY".

⚠️ InvITs: securities "issued by entities managing LARGE INFRASTRUCTURE ASSETS WITH LONG TERM CONTRACTS THAT ENSURE STEADY AND PERIODIC RETURNS (WITH PREDICTABLE AND LOWER LEVEL OF RISK TAKING ON THEIR CASH FLOW)... PREFERRED BY LOW RISK TAKING LONG TERM INVESTORS SUCH AS PENSION FUNDS AND INSURANCE COMPANIES. InvITs are ALSO LISTED AND TRADABLE ON THE CAPITAL MARKET MAKING THEM AKIN TO TRADITIONAL ASSETS".

4.4 Commodities

Like gold, commodities are often held to guard against rising prices.

⚠️ "Just as gold and other precious metals, gems and jewellery are used as HEDGE AGAINST INFLATION; COMMODITIES OFTEN SERVE THE SAME PURPOSE. Though SOFT COMMODITIES SUCH AS AGRICULTURAL PRODUCE INCLUDING CASH CROPS SUCH AS COTTON, COFFEE ARE MORE COMMON IN TRADE AND SPECULATION, ALTERNATIVE INVESTORS USUALLY LOOK FOR OPPORTUNITIES IN HARD COMMODITIES SUCH AS OIL & GAS AND METALS (SUCH AS COPPER, ALUMINIUM AND PRECIOUS METALS)".

4.5 Derivatives and hedge funds

A derivative can trade on an exchange or in a private deal between two parties. Either way, it carries more risk than a plain share or bond.

⚠️ Derivatives "can be bought or sold BOTH ON A STOCK EXCHANGE (KNOWN AS EXCHANGE TRADED DERIVATIVE CONTRACTS) AND IN OFF-MARKET BILATERAL DEALS (KNOWN AS OVER-THE-COUNTER OR OTC DERIVATIVES). Since derivatives are speculative, THEY INVOLVE HIGHER RISK-TAKING THAN STOCKS OR BONDS".

⚠️ "It is THE ABILITY OF THESE FUNDS TO GO BOTH LONG AND SHORT IN VARIOUS MARKETS THAT HAS GIVEN THEM THE NAME 'HEDGE FUNDS'".

⚠️ SEBI's definition: "an ALTERNATIVE INVESTMENT FUND WHICH EMPLOYS DIVERSE OR COMPLEX TRADING STRATEGIES AND INVESTS AND TRADES IN SECURITIES HAVING DIVERSE RISKS OR COMPLEX PRODUCTS INCLUDING LISTED AND UNLISTED DERIVATIVES".

⚠️ Other avenues: "GEMS AND PRECIOUS STONES, ARTS AND ANTIQUES AND SUCH OTHER EXOTIC INVESTMENT OPPORTUNITIES".

Think of it like this

The vegetable market and the standing crop

In the mandi you can sell a sack of onions this morning and have cash by evening. The price may be poor, but the exit exists.

A farmer who has planted a crop cannot do that. His wealth is real, and it may be worth more than the sack of onions — but it is in the ground for four months.

That is the whole distinction. "Traditional investments are primarily ON-MARKET OPPORTUNITIES WHOSE COMMON FEATURE IS LIQUIDITY, i.e. NEARNESS TO CASH." And "THE ESSENTIAL CHARACTERISTIC OF ALTERNATIVE INVESTMENTS IS 'ILLIQUIDITY'."

The dual category is the farmer who has sold a warehouse receipt on his standing crop, which itself trades. The crop is still in the ground; the paper is liquid. That is a REIT — "structures that have UNDERLYING ILLIQUID ASSETS BUT THE INSTRUMENTS PER SE MAY BE LIQUID."

The chit fund and the neighbourhood collection

A registered chit fund advertises publicly, takes small sums from anyone who walks in, and is regulated as such. A group of twelve neighbours who pool money among themselves is a different thing — private, closed, and by invitation.

"PRIVATELY POOLED" is the operative phrase in the AIF definition — "the fund is POOLED FROM SELECT INVESTORS AND NOT FROM THE GENERAL PUBLIC AT LARGE."

And note who is deliberately kept out of the definition: mutual funds and collective investment schemes (which take public money), family trusts, ESOP trusts, holding companies and securitisation SPVs (which are a family's or a company's own money), and funds regulated by the RBI or another regulator.

The exclusions all share a logic: "either PRIVATE FUNDS OF A COMPANY, BUSINESS OR A FAMILY OR THOSE THAT ARE REGULATED BY OTHER REGULATORS." An AIF sits in the gap between the two.

The nursery and the orchard

A nurseryman raises saplings. Most will not survive; a few will become trees. He does not know which, and he cannot tell by looking.

That is venture capital — investment in "INFANT COMPANIES WITH BUSINESSES THAT ARE YET TO GROW OR EVOLVE COMPLETELY", which "ARE SUSCEPTIBLE TO HIGH MORTALITY RATE", and where "ASSESSING THEIR FUTURE POTENTIAL IS ALSO A DIFFICULT AND COMPLEX TASK."

An orchard owner buying an established mango grove faces a different question entirely — not "will these survive" but "what will they yield, and is the price right".

That is private equity in the narrower sense — "INVESTMENT IN COMPANIES WITH ESTABLISHED BUSINESS MODEL AND TRACK RECORD, KNOWN AS 'LATER STAGE' COMPANIES."

And note the family relationship: "VENTURE CAPITAL IS A TYPE OF PRIVATE EQUITY USED FOR EARLY STAGE BUSINESSES." The nursery is part of horticulture, not a different trade.

The word "equity" on a shop signboard

"Sweet shop" in a small town sells sweets, savouries, tea and sometimes lunch. The name on the board is narrower than the trade inside.

"Private equity" is like that. In ordinary usage, equity means equity share capital. But "in the context of private equity, IT REFERS TO THE TOTAL CAPITAL RAISED FROM PRIVATE INVESTORS EVEN THOUGH THE INSTRUMENT USED MAY NOT ALWAYS BE AN EQUITY SHARE."

It can be equity, preference, debt or mezzanine capital — the last being "funds provided in a HYBRID STRUCTURE INVOLVING THE FEATURES OF BOTH DEBT AND EQUITY."

Which is why "pure PRIVATE DEBT FUNDS AND HYBRID FUNDS ARE ALSO PREVALENT IN THE INDUSTRY", and why the SEBI (AIF) Regulations take care to "DIFFERENTIATE BETWEEN PRIVATE EQUITY FUNDS AND PURE DEBT FUNDS."

The tide and the fisherman's skill

Every boat in the harbour rises with the tide. That is beta — "the representation of what is known as 'SYSTEMATIC RISK' OR THE NON-DIVERSIFIABLE RISK." A stock with beta of 1.0 "PERFECTLY MIRRORS THE MARKET VOLATILITY"; below 1.0 it is "LESS VOLATILE (AND THEREFORE LESS RISKY) THAN THE MARKET."

But one fisherman comes back with more than the others, on the same tide, in the same water. That is alpha.

The workbook gives it two connotations. First, "the excess return expected from assuming 'UNSYSTEMATIC RISK'... due to ILLIQUIDITY, LOWER CREDIT QUALITY OR OTHER DISTINGUISHING FACTORS." Second, "an EXPECTED SUPERIOR PROFIT DUE TO THE USE OF SKILL OF THE FUND MANAGER IN THE SELECTION AND ALLOCATION OF INVESTMENTS."

The second is sometimes called "ALTERNATIVE BETA" — and a fund claiming "an alpha of 3%–5% over index returns" is claiming that "DUE TO THE ACTIVE FUND MANAGEMENT SKILLS BEING DEPLOYED, THE FUND IS EXPECTED TO CONSISTENTLY OUTPERFORM COMPETITIVELY PRICED ASSETS OF SIMILAR RISK BY AN AVERAGE OF 3%–5% PER YEAR."

The trader who sells short as well as buys

A cloth merchant who only buys stock profits when prices rise and suffers when they fall. A merchant who can also sell forward what he does not yet own can profit either way — and can lose either way too, faster.

That second merchant is a hedge fund, and the workbook names three features that mark one out: it may "INVEST ACROSS DIFFERENT CLASSES OF ASSETS — FINANCIAL ASSETS, CURRENCIES, COMPLEX DERIVATIVES"; it uses "COMPLEX TRADING STRATEGIES SUCH AS ARBITRAGE, CARRY TRADE, FOR VARIABLE OUTCOMES AND COMPLEX RISK PATTERNS"; and it takes "BOTH LONG AND SHORT POSITIONS AND USES SIGNIFICANT LEVERAGE AT FUND LEVEL."

The name is an irony worth remembering: "IT IS THE ABILITY OF THESE FUNDS TO GO BOTH LONG AND SHORT IN VARIOUS MARKETS THAT HAS GIVEN THEM THE NAME 'HEDGE FUNDS'" — a name describing a mechanism, not a promise of safety.

And borrowing at fund level cuts both ways: "the fund IS OBLIGATED TO PAY BACK THE DEBT IRRESPECTIVE OF INVESTMENT GAINS OR LOSSES."

Key terms in this chapter

Alpha: Excess return over market returns. It means either the excess return from assuming unsystematic risk arising from illiquidity or lower credit quality, measured after adjusting for risk differences; or superior profit from the fund manager's skill in selection and allocation.
Alternative Beta: The name some schools of thought give to alpha in its second sense — excess return attributable to the fund manager's superior skill rather than to assuming a different kind of risk.
Alternative Investment: A financial asset that does not fall into one of the conventional investment categories of stocks, bonds and cash. There is no uniform global classification, so it is defined by exclusion.
Alternative Investment Fund (AIF): Under the SEBI (AIF) Regulations, 2012, primarily a privately pooled investment vehicle collecting funds from India or abroad for a defined investment policy, from select investors rather than the general public at large.
Beta: The representation of systematic or non-diversifiable risk, measuring a stock's responsiveness to changes in overall market volatility. A beta of 1.0 perfectly mirrors the market; below 1.00 the stock is less volatile and less risky.
Buyout: A control acquisition in which investors seek a controlling interest of 51 per cent or more of the share capital or voting rights of a target company. A leveraged buy out is a buyout done with significant leverage.
Distressed Asset Fund: A fund that finances or acquires companies in financial distress, listed among alternative investments alongside funds investing in special situations such as mergers, acquisitions, hostile acquisitions and restructuring.
Dual Category: Structures with underlying illiquid assets whose instruments are nonetheless liquid, being listed or redeemable through the mutual fund route with restrictions — such as REIT and InvIT units, security receipts and closed ended debt funds with illiquid assets.
First-mover Returns: High returns resulting from investing early into new asset classes, one of the opportunities the workbook says asset allocators should not miss.
Hedge Fund: Under SEBI, an AIF which employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products including listed and unlisted derivatives. It invests across asset classes, uses complex strategies, and takes both long and short positions with significant fund-level leverage.
InvIT: An Infrastructure Investment Trust — units issued by entities managing large infrastructure assets with long term contracts giving steady, periodic and predictable returns, preferred by low risk long term investors such as pension funds and insurance companies.
Leveraging at Fund Level: The fund entity borrowing from market sources to make investments, seeking arbitrage returns by using cheaper debt for higher gains — but increasing overall risk because the debt must be repaid irrespective of investment gains or losses.
Mezzanine Capital: Funds provided in a hybrid structure involving the features of both debt and equity capital, one of the forms in which private equity may be supplied.
Private Equity: The generic term for direct investment in unlisted companies — equity capital raised from external investors without accessing public equity markets — predominantly denoting later-stage companies with an established business model and track record.
Privately Pooled: The phrase in the AIF definition denoting that the fund is pooled from select investors — institutions and HNIs who understand higher risk taking and complex arrangements — and not from the general public.
REIT: A Real Estate Investment Trust — a security entitling holders to the underlying cash flow generated from rent yielding properties, allowing sector exposure without physically holding real estate. Being listed and liquid, REITs are sometimes classed as traditional or dual.
Security Receipts: Exchange traded instruments with stable and predictable cash flows issued by securitisation companies, SPVs and Asset Reconstruction Companies, classed in the dual column.
Special Situations: Complex corporate transactions where one company takes ownership control of another or a company reorganises its assets and liabilities due to financial difficulties.
Start-up (DPIIT definition): A business not more than 10 years old that has not recorded turnover of more than INR 100 crore in any financial year, engaged in innovation, development or improvement of products or a scalable business model with high potential for employment or wealth generation.
Traditional Investment: Financial securities such as stocks and bonds from the primary and secondary capital market, general mutual fund units and exchange traded funds — as distinguished from bank deposits, government schemes, ornamental gold and residential property for living purposes.
Venture Capital: Direct investment in infant or early-stage companies concerned with new products, services, technology or intellectual property based activities, or a new business model. Such businesses are susceptible to a high mortality rate.
Venture Capital Undertaking: The term used under the AIF Regulations for a company in which venture capital is invested.

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Original explanatory writing based on the official NISM workbook for Series XIX-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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