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The Alter-NATIVE series Alternative Investments: A Primer

Alternative Investments: A Primer

Read on to find key benefits of alternative investment funds.
Edelweiss Feature Jun 22, 2017

The word “Alternative Investments” has been slowly gaining currency for quite a while now. As an investor it is important that you know about this powerful asset class that has the potential to impact your portfolio returns. Alternative Investments is a broad term that includes assets that cannot be classified into the category of stocks, bonds or cash. These can also include investments that use strategies that go beyond traditional ways of investing, such as long/short or arbitrage strategies.  

Key aspects of Alternative Investments:

  • Different from traditional asset classes
  • Low correlation to traditional asset classes
  • Defined by their investment approach and not necessarily their platform
  • Focus on risk-adjusted returns rather than relative return

Alternative Investments can broadly be classified:

Based on asset – Hedge funds, ETFs and Mutual Funds, Real Estate, Private Equity, Venture Capital, Commodities will all fall into this category. Hedge Funds have long been considered the flag-bearers of alternative investments. However, investors can now consider investing in an array of alternate assets like maybe even peer-to-peer loans that have the potential to diversify their portfolio.

Based on strategies – Another way of classifying these investments is the strategies that are used to gain exposure to a particular asset class. Long/short equities, global macro, managed futures, multi-strategy will fall into this category. These eschew the traditional buy and hold strategies in favour of long/short strategies. One can also adopt theme-based strategies that focus on global macroeconomic parameters or event driven.

Now let us understand the difference between mutual funds, PMS and alternative investments.

It is time that we start looking at Alternative Investments from a brand new lens. As an investor you have made the necessary allocations to meet your short-term as well as long-term goals.  It is now time to take your portfolio up a notch and diversify into alternative investments. Adding them to a portfolio can potentially provide the benefits of diversification, risk mitigation and enhanced returns. It is important to understand that these investments can be used as a vehicle to enhance your client’s portfolio and give it more of a balance. Traditionally, most portfolios are skewed in favour of vanilla equity and fixed income assets. Alternative investments help reduce that skew.

It has been observed that often when stocks and bonds drop, assets like commodities and real estate may rise. Additionally, it has also been seen that alternative strategies like long/short have a high potential to generate alpha. Alternatives are not really meant to replace your portfolio, but rather form a part of your current portfolio.

At this juncture, we feel the need to highlight the key differences between Alternative Investment Funds (AIFs), Mutual Funds (MFs) and Portfolio Management Services (PMS).

 

TYPE

MF

PMS

AIF

Investment Type

Pooled

Not pooled.

Investors individually hold stocks.

Pooled

Customised Solutions

Cannot be customised

Can be customised

Cannot be customised

Minimum Ticket Size

Rs. 1000

Rs. 25 lakh

Rs. 1 crore

Exposure

100% of their fund size

100% of their fund size

Cat I & II: 100% of fund size
Cat III – upto 200% of funds size

 

Distribution

Open-Public

Open-Public

Private Placement

       

 

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