Client Suitability and Alternative Investments Flashcards

What is 'infrastructure' as an alternative investment and what are its key characteristics?

Answer: Investment in physical infrastructure assets such as roads, bridges, airports, and utilities, typically offering long-duration, inflation-linked, predictable cash flows with low correlation to equities

Infrastructure assets (toll roads, airports, water utilities, renewable energy) typically offer stable, long-term, inflation-linked revenues (often backed by government contracts or regulated monopoly status), low correlation with equities, and long asset lives — making them attractive for pension funds seeking liability-matching returns.

What is a 'Real Estate Investment Trust' (REIT) and what is its key tax advantage?

Answer: A listed company investing in property that qualifies for special tax treatment: no corporation tax on rental income or capital gains on property, provided it distributes at least 90% of qualifying rental income to shareholders

A REIT is a listed property investment company that, provided it meets qualifying conditions (including distributing 90%+ of property rental income), pays no corporation tax on its rental income or property capital gains at the fund level. Income is taxed in investors' hands when distributed.

What is 'commodity' investment and what risks does it carry?

Answer: Investment in raw materials (such as gold, oil, agricultural products) directly or through derivatives, ETFs, or funds — carrying price volatility, storage costs, no income, and exposure to geopolitical and supply/demand factors

Commodities are physical raw materials. Investors can access them through physical holdings, commodity ETFs, futures contracts, or equity funds investing in commodity producers. They carry no income yield, are highly volatile, influenced by supply/demand dynamics, geopolitics, and currency movements, and may face roll costs in futures-based vehicles.

What does 'KYC' (Know Your Customer) require in relation to high-net-worth or institutional investment clients?

Answer: A comprehensive due diligence process including verification of identity, source of funds and wealth, business purpose of the relationship, beneficial ownership, and ongoing monitoring — with enhanced due diligence for higher-risk clients

KYC for high-net-worth and institutional clients requires enhanced due diligence: verifying identity, understanding the source of wealth and funds, identifying beneficial owners, understanding the purpose of the business relationship, and ongoing monitoring. Politically exposed persons (PEPs) and higher-risk clients require enhanced scrutiny.

What is a 'liquid alternative' fund?

Answer: A UCITS-regulated fund that employs hedge fund-like strategies (such as long/short equity, global macro, or market neutral) but within the liquidity and diversification constraints of the UCITS framework, accessible to retail investors

Liquid alternatives (or 'alt UCITS') bring hedge fund strategies into the regulated UCITS wrapper. This means they must meet UCITS requirements: daily liquidity, diversification limits, no direct leverage above 200% of NAV. They offer alternative return streams to retail investors within a regulated, liquid structure.

When assessing client suitability for alternative investments, what additional considerations apply compared to mainstream investments?

Answer: Advisers must assess the client's specific understanding of alternatives (complexity, illiquidity, leverage), ensure the allocation is appropriate within the overall portfolio, confirm the client's capacity to lock up capital for potentially long periods, and consider whether the client qualifies as a sophisticated or high-net-worth investor

Alternative investments require additional suitability considerations: the client must understand specific risks (illiquidity, complexity, leverage, high charges, potential for total loss), the allocation must be appropriate within the total portfolio context, the client must be able to lock up capital, and certain alternatives require the client to be categorised as a sophisticated or high-net-worth investor.