With the development of financial markets, alternative investments such as hedge funds, private equity, real estate, commodities, and infrastructure have become more accessible to investors. However, alternative investments have risks and regulations that are different from traditional investments. This article will introduce the methods to access alternative investments, the main alternative investment strategies, and the risks and regulations investors need to understand when investing in alternatives.
Invest directly for control but requires expertise
The most direct way to access alternative investments is to invest directly. This allows full control over the assets purchased but requires expertise to evaluate deals and perform due diligence. Investors must also have large enough capital to meet minimum investment requirements which are often higher than fund investments. Direct investment provides customized exposure but the assets will be less diversified.
Invest through funds for diversification and manager expertise
Investing through a fund pools capital across multiple underlying investments chosen by the fund manager. This provides diversification and leverages the manager’s expertise in selecting and managing the investments. Investors pay management fees and incentive fees but need less capital and expertise than direct investing. The drawback is less control and transparency into the specific assets held.
Use co-investing to access specific deals with lower fees
Co-investing allows investors to partner with a fund manager to invest directly in specific deals the manager selects. This combines the benefits of fund diversification and manager expertise with the control of choosing particular investments. Co-investors pay lower fees than full fund investors but take on more responsibility for evaluating investments.
Understand regulations limiting access to accredited investors
Many alternative investments are restricted to accredited investors who meet defined wealth and sophistication requirements. This includes individuals with net worth over $1 million or income over $200,000 and institutions with over $5 million in assets. The rationale is to limit unsuitable investors unable to bear the risks. But expanded access for lower net worth investors is being considered.
Learn alternative strategies like hedge funds and private equity
Alternative investments use strategies beyond traditional long-only stocks and bonds. Major categories include hedge funds using leverage and derivatives for absolute returns, private equity investing in non-public companies, real estate, commodities, and infrastructure projects. Investors should understand the strategies, risks, and performance drivers before investing.
Accessing alternative investments directly or through funds allows customized exposure but requires capital and expertise. Investing in alternatives has higher fees but may improve portfolio diversification. Understanding the strategies, risks, and regulations is key before allocating to alternatives.