What are alternative investment funds?

Tendersetter

9:30 am

17 June 2019

Alternative investment funds are funds with a portfolio that does not include traditional instruments such as cash, equities and bonds. More specifically, alternative investment funds generally have the following characteristics:

  • They do not follow a benchmark
  • They may generate high returns
  • Their risk level is medium/high
  • Their returns display high volatility
  • They are generally used by institutional investors and high net worth individuals
  • They have low liquidity
  • They can take many different forms

Are alternative funds a good investment?

As alternative funds have the potential to deliver high returns, they are particularly dependent on the skill of the fund manager and usually have a high risk/reward ratio. They generally enable investors to build a highly diversified portfolio.

Using alternative funds to diversify investments makes for an effective risk mitigation strategy. Moreover, alternative funds have a low correlation with equity and bond markets, so they can deliver good returns even when the traditional markets are performing poorly.

Types of alternative investment

There are several types of alternative investment.

Hedge funds

These funds use specific hedging strategies, and can invest in almost any asset class. A skilfully managed hedge fund can deliver a much better performance than traditional funds. However, the risks are naturally much higher.

Private equity funds

These funds invest in small and medium-sized firms, with the aim of supporting their growth, particularly during critical periods in their lifecycle. (To find out more about the Tendercapital VIII Debt Opportunities fund, click here).

Venture capital funds

These funds invest in small and medium-sized firms with strong growth potential.

Although they are high-risk investments, they can generate excellent returns. This is the type of alternative finance accessed by start-ups and companies that intrinsically have a high failure rate, but if they are successful, investors can reap handsome rewards when they exit.

 

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