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The Little Book of Alternative Investments: Reaping Rewards by Daring to be Different by Phil DeMuth, Ben Stein

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Chapter Four

More Alternatives We Don’t Love

The Elephant’s Graveyard of Financial Products

As Groucho Marx sings in Horsefeathers, “Whatever it is, I’m against it!” Well, we’re not against everything. Just private equity, buy/write funds, structured products, 130/30 funds, and precious metals. These all have their place, but that place is not in your portfolio. Here’s why . . .

Private Equity

Private equity is often mentioned in the same breath as hedge funds as the preferred investment for the elite. What is private equity, anyway? Is there some way the little guy can scoop his bread into this gravy?

Private equity falls into two broad categories: venture capital and leveraged buyouts. They are alike in that they are both illiquid investments that will tie up your money for years. We will take them on one at a time.

Venture capital is what most people mean by private equity. After a start-up business reaches the point where the hapless founder can no longer run it on his personal credit cards, he needs outside sources of capital to help take his company to the next level. The founder has already tapped out his in-laws, friends, and everybody he knows. He goes to a banker for a loan, but all the banker can see is big dreams, a big stack of debts, and no revenue. What is this entrepreneur to do?

Rich people, pension plans, and endowments are happy to lend him money if they think his fundamental business plan is sound. These folks pool their money into a venture capital fund,

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