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An alternative investment fund (AIF) is a collective investment in so-called ‘non-standard’ tangible and non-tangible assets whereby investors’ capital is pooled, and the returns are also pooled.

When investors place their money into products that don’t fall under the ‘mainstream’ label of stock, bonds, and cash, an opportunity may lie within the alternative investment market.

High risk investing for professional investors

AIFs carry a greater degree of risk than conventional investment funds, but they’re attractive to some investors due to the potential for greater reward – typically professional investors or high net worth individuals.

Other benefits of investing in AIFs include flexibility in comparison with mainstream investment funds. Julie Palmer, RBR Advisory partner, takes a look at some of the common characteristics of alternative investment funds and the potential benefits and drawbacks for investors.

Common features of alternative investment funds

Alternative investment funds can include tangible assets such as wine, watches, and fine art, but also intangible assets such as hedge funds and private equity. Low liquidity is a feature of many alternative investments, and there’s typically little connection between ‘traditional’ investment products and alternative investment funds.

High fees and significant initial investment requirements are also characteristic of AIFs. Concerns about transparency and lack of information have been voiced in the past, and accurately valuing alternative investment funds has also been an issue.

What type of assets might be included in an alternative investment fund?

An alternative investment fund might include:

Tangible assets

  • Stamps
  • Precious metals
  • Fine wine
  • Whisky
  • Fine art

Intangible assets

  • Venture capital
  • Derivatives
  • Cryptocurrencies
  • Hedge funds
  • Private equity
"Alternative investment funds can include tangible assets such as wine, watches, and fine art, but also intangible assets such as hedge funds and private equity."

What are liquid alts?

Since the global financial crisis of 2007 there’s been a rise in the availability of liquid alternative investments, also known as liquid alts. These types of funds might include mutual funds, for example, or exchange-traded funds (ETFs), which typically offer a lower minimum investment level than other AIFs.

Liquid alts are a category of alternative investment designed to provide greater liquidity for investors, whilst still allowing them to use an alternative investment strategy within their portfolio.

EU legislation for AIF managers

European Union legislation in the form of the Alternative Investment Fund Managers Directive (AIFMD) came into force in the UK in July 2013 to address some of these issues. The AIFMD is an EU ruling that provides a regulatory framework that AIF managers must adhere to.

The regulation covers the marketing and management of AIFs, as well as administration. It’s designed to offer protection to investors in the form of greater transparency and availability of information pre-investment, but also to reinforce the alternative investment market as a whole.

Benefits and downsides of investing in an alternative investment fund

These are just a few of the advantages and disadvantages of investing in AIFs:

Benefits

  • Flexibility
  • Diversification of investment portfolio
  • Potential for higher rewards

Downsides

  • Lack of liquidity
  • Higher fees and larger initial investment
  • Greater risk of loss of capital
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