Apr 29, 2023 (SeoXnewsWire) — Alternative investment funds have been a popular option for those looking for portfolio diversification and higher returns than traditional investments offer. People who invest money online can also choose alternative funds for diversification.
But despite 89% of investors showing interest in this class, around 87% have never tried the modality, according to a survey.
And as we know, people often stop investing due to lack of information. Therefore, let’s explore what they are, how they work, the main types of alternative assets and how to invest.
Alternative investment funds: what are they
Alternative investment funds are an asset class with several non-traditional investment strategies.
They are different from traditional funds, which typically invest in stocks, bonds and other public and private securities. Alternatives can be said to have a broader and more diversified approach to investing.
In this sense, alternative investment funds invest in non-conventional assets, such as Private Equity, Hedge Funds, real estate, Commodities and works of art, for example.
They can also use sophisticated investment techniques such as leverage, arbitrage and derivatives investing to earn higher returns.
These funds are generally only accessible to accredited investors such as financial institutions, family offices and high net worth individuals due to their minimum investment requirements and complex fee structures.
How alternative investment funds work
Alternative investment funds generally follow a specific strategy, with the aim of generating above-market returns. These strategies may include investments in private companies, infrastructure projects, real estate, startups or distressed assets.
This type of fund is usually structured as limited partnerships or limited liability companies (LLCs), and are managed by professional managers.
It is also common for investors in alternative investment funds to make long-term commitments, as these funds can have a longer investment horizon than traditional ones.
Alternative investments: main types of alternative assets
Before investing in alternative investment funds, it is important to understand the different types of assets available and how they work.
The main types include Private Equity, Venture Capital, Real Estate, Crowdfunding and Debentures. Each type of alternative asset has its own characteristics and risks, and it is important to understand the scenario before investing.
We’ll explore each of these types in more detail below.
Private Equity
Private Equity funds (PEF) invest in middle market companies, which are not publicly traded on stock exchanges. Generally, the goal is to acquire a significant equity stake in the company.
Private Equity managers work with companies to improve their operational efficiency and increase their value, to exit the investment in a predetermined period – which can vary between 5 or more than 10 years.
The idea is to subsequently sell such assets to institutional investors or in initial public offerings (IPOs).
Venture Capital
Venture Capital funds invest in startups with high growth potential. The focus of this alternative investment is young companies or companies that have not yet started operations.
Managers provide capital and strategic direction to companies to help them grow and become profitable. Companies such as Facebook are examples of institutions that received VC support in their inception.
Such investments are usually high risk but can also offer high potential returns.
Venture Capital and Private Equity: the difference
While Venture Capital and Private Equity funds have some similarities, the main difference is in the nature of the strategy.
Venture Capital funds tend to invest in companies at the beginning of their trajectory. The goal is to help them grow and reach their market potential.
Meanwhile, Private Equity funds tend to invest in established companies, with the aim of improving their operational efficiency and increasing their value.
Infrastructure & Real Estate
Investments in Infrastructure and Real Estate generally involve the purchase and development of properties, such as office buildings, shopping malls, airports and highways. These investments can provide stable and consistent income over the long term.
They present themselves as an alternative to real estate funds. In these alternative funds, the rate of return ends up being as important as the dividends, due to the nature and magnitude of the assets.
Distress & Special Situations
Distress & Special Situations investments involve buying companies that are in financial difficulties or facing special problems, such as a debt restructuring or bankruptcy.
However, the focus of this fund is on consolidated companies. In other words, businesses with a good valuation, but which are going through a delicate moment such as problems with debts, holdings and auctions, for example.
In this alternative fund, shareholders participate in the company’s decisions and guidelines, depending on the size of the share.
Crowdfunding
Crowdfunding is a type of crowdfunding in which several people contribute money to finance a project or company.
Crowdfunding investments are generally smaller than other types of alternative assets, but can provide opportunities to invest in high-potential, innovative projects.
Debentures
Debentures are debt securities issued by companies seeking to raise funds.
By investing in debentures, investors lend money to the organization in exchange for an interest rate. They are usually an interesting option for those looking for an alternative to traditional fixed income investments.
Also, debentures can be classified into different types, depending on payment terms and investor rights.
Some, for example, may have priority in receiving payments over the company’s other debts in the event of bankruptcy. Others may be convertible into shares or offer different forms of profit sharing.
Hedge Funds
Hedge Funds are funds that can invest in a wide variety of assets, including stocks, bonds, commodities and derivatives. Because of this, they are also called hedge funds.
Hedge Funds use a variety of strategies, such as arbitrage, leverage and short-term trading, to achieve returns superior to traditional investments.
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