What are the advantages and disadvantages of alternative investment funds?
If you’re considering investing in an AIF, you should first obtain detailed information on the background and conditions of the respective fund. Precisely because of their complexity, there are a number of things to consider here.
Let’s first look at the advantages of alternative funds:
Transparency
Whilst equity funds are often less transparent in their selection of assets and not much can be gleaned from names such as “Technology Asia”, AIFs offer a significantly better overview. With specific tangible assets and selected investment projects, you maintain a clear overview of where your money is going and how the opportunities and risks of a particular project break down.
Investing in major projects
Investing in AIFs gives you access to investments with a volume in the millions. This can also create opportunities for private investors to invest in particularly exciting real estate or - thanks to ELTIFs - in infrastructure projects.
Increase in value
It is not only retail investors who are increasingly learning to appreciate AIFs. Institutional investors, such as life or pension insurance companies, are also looking for ways to be able to meet the promised guarantees in a volatile interest rate environment.
All the players on the financial market now agree that to ensure profitability and beat inflation, investments in government bonds or savings alone are no longer sufficient.
High returns
AIFs make it possible for investors to achieve above-average returns - whether for wealth building or how to make a fortune. The advantage of this is that the portfolio does not have to be too dependent on the stock market and its associated risks.
Uncomplicated tangible asset investments
By focusing on tangible assets, alternative funds offer their investors a lot of stability, for example through long-term purchase agreements or in the form of real estate leases that protect investors and their capital from inflation.
Here, investors can benefit from the success of tangible assets without taking on the expense and cluster risk of owning real estate. The financial outlay is even limited, as investments in good AIFs usually start at around 10,000 euros.
Active management
AIF investors also benefit from the active management of the fund, which is undertaken by experts and fund managers, and provides investors with enough security to either sit back or engage with more time-consuming investment opportunities.
Regular distributions
AIFs often provide for regular distributions that are paid to their investors. However, these distributions depend on the planned course of the investment and cannot be guaranteed.
Professional investments
AIFs for semi-professional or retail investors provide access to an asset class previously only intended for institutional or professional investors.
This opens up investment opportunities that were previously not accessible with traditional investments. Many of these hurdles have been further reduced with the 2024 ELTIF 2.0 reform. ELTIFs such as klimaVest (renewables) and infraVest (infrastructure) are now also generally accessible to private investors without a minimum investment amount.
Diversification
With AIFs, you can significantly improve the diversification in your portfolio. Infrastructure, for example, is still often under-represented and can expand your portfolio profitably.
Now let’s look at the disadvantages of alternative investment funds:
Required expertise
If you are an expert in the trading of goods by ship, it should not be difficult for you to select a suitable AIF in the form of a shipping fund. However, anyone who does not have proven expertise in any specific area of tangible assets should carefully select a competent and convincing fund provider.
Even if the capital is managed by an expert, your capital is still being injected into a highly competitive market. It is therefore advisable to protect yourself as best as possible by obtaining your own specialist knowledge or using a competent provider.
Redemption restrictions
Simple redemptions or uncomplicated sales of shares on the secondary market are usually not easily possible with AIFs. If investors therefore want to redeem their units early – due to an emergency or even a particularly favourable market situation – they must be prepared to accept certain losses.
Costs
Those who are well acquainted with the usual costs of traditional investments will encounter some differences with AIFs that they may not have been aware of. In this still quite new and diverse area of investment, there are other circumstances that are also reflected in the costs involved. Due to the complexity of the product and the associated administrative burden, fund providers often charge higher management fees and initial charges may also vary.
In addition, factors such as the maintenance of the investment properties or a particular focus on sustainability must be taken into account when calculating the costs. Experienced investors would therefore do well to consider the different fees charged by alternative funds in advance.
Management company as a risk factor
The responsible management company of an AIF is not only responsible for the design of the financial product, but also for the fund management and the support, maintenance, management and marketing of the project. It therefore has extensive responsibility when it comes to the successful management of the product.
For the product to succeed, it must therefore also be ensured that the management company can demonstrate a relevant reputation and a correspondingly positive skills profile. Gaps in the skills of the management company can have a correspondingly negative impact on investors’ investment or investment capital.
No guarantee of returns
As AIFs are not fixed-income investments, a promised or calculated return cannot be guaranteed under any circumstances. In the worst case, this can mean a total loss of your investment, for example if the responsible management company files for insolvency.
For example, if a property does not generate the forecast amounts over a term of 15 years, it will also not bring in the calculated sales price. The advantage of equity investments of being able to simply ride out falling prices in an emergency is definitely not the case here.
In principle, it is difficult to summarise the advantages and disadvantages and thus also the opportunities and risks for AIFs in general. With such a wide field, the general conditions vary greatly depending on the product and the tangible asset – for example, it is difficult to compare a hedge fund with a film fund.
However, alternative funds are generally corporate investments whose risk class is rated at least 5 (above-average risk) on a scale of 1 to 7.
But let’s not forget: the German Investment Code (KAGB) regulations introduced in 2013, as well as the control by the Federal Financial Supervisory Authority (BaFin), have already provided significantly higher transparency in the area of AIFs. This has also reduced risks for investors – provided they have the required knowledge about the planned investment in advance. Although the new law could not actually eliminate any risks, investors are now being made much more explicitly aware of them.
