What are Alternative Investments?
Alternative investments, also known as Alternate Investment Funds (AIFs) are financial assets that do not fall into conventional categories like stocks, bonds, or cash. They include assets like real estate, private equity, hedge funds, commodities, and more.
These investments often have unique characteristics and may offer diversification benefits, potentially reducing the overall risk of an investment portfolio. They can be an attractive option for investors looking to achieve higher returns or diversify beyond traditional investment options.
Category I: Socially or Economically Beneficial Investments
Category II: Other AIFs (No Leverage Except Operational Costs)
Category III: Complex Strategies with Leverage
An investor allocates a portion of their portfolio to various alternative investments. They invest in a private equity fund that acquires shares in a rapidly growing technology company. Simultaneously, they purchase commercial real estate property generating rental income.
Additionally, the investor buys gold to hedge against market volatility. Over time, the private equity investment yields high returns as the tech company expands, the value of the real estate property appreciates while providing consistent income, and the gold maintains its value during economic downturns, collectively enhancing the investor's portfolio performance.
These investments often have unique characteristics and may offer diversification benefits, potentially reducing the overall risk of an investment portfolio. They can be an attractive option for investors looking to achieve higher returns or diversify beyond traditional investment options.
Understanding Alternative Investments
Alternative investments provide diversification and the potential for higher returns with high risk compared to traditional investments . These assets, which include real estate, commodities, private equity, and hedge funds, offer exposure to different markets, spreading risk. Although they can hedge against market volatility, inflation, and currency risks, they often come with higher fees, less liquidity, and greater complexity. Investing in these assets requires expertise and understanding of specific markets, but they attract investors for their unique opportunities and ability to enhance overall portfolio performance.Types of Alternative Investments
There are various types of alternative investments that investors can consider. Broadly speaking, there are 3 categories that alternate investment funds can be put into:Category I: Socially or Economically Beneficial Investments
- Venture Capital & Angel Funds: Invest in early-stage, high-growth businesses
- SME Funds: Invest in small & medium enterprises with strong track record
- Social Venture Funds: Invest in companies with positive social/environmental impact
- Infrastructure Funds: Invest in railways, bridges, airports, etc.
Category II: Other AIFs (No Leverage Except Operational Costs)
- Private Equity Funds: Invest in unlisted companies for growth
- Debt Funds: Invest in debt securities of unlisted companies
- Fund of Funds: Invest in multiple AIFs (indirectly in stocks/bonds)
Category III: Complex Strategies with Leverage
- Private Investment in Public Equity Fund (PIPE): Invests in discounted shares of listed companies
- Hedge Funds: Use advanced strategies (short selling, derivatives) for high returns
Example of Alternative Investments
Let us now consider an example of alternative investment:An investor allocates a portion of their portfolio to various alternative investments. They invest in a private equity fund that acquires shares in a rapidly growing technology company. Simultaneously, they purchase commercial real estate property generating rental income.
Additionally, the investor buys gold to hedge against market volatility. Over time, the private equity investment yields high returns as the tech company expands, the value of the real estate property appreciates while providing consistent income, and the gold maintains its value during economic downturns, collectively enhancing the investor's portfolio performance.
