What are alternative investment funds?

Alternative investment funds (AIFs), managed by professional fund managers, pool money from numerous investors to collectively invest in a diversified portfolio of alternative assets.

Alternative investment funds encompass a range of non-traditional assets beyond conventional stocks and bonds. For example, an alternative investment fund might include assets like private equity, real estate, and commodities.

These funds, which offer investors access to less liquid markets, provide opportunities for portfolio diversification. Because alternative assets are largely uncorrelated to public market fluctuations, they can help protect portfolios from downswings and boost resilience.

Alternative investment funds have distinct characteristics that set them apart from traditional investment options, beyond the asset classes in which they invest. Some notable differences include:

  • Professional management: Alternative investment funds are actively managed by investment professionals, known in this case as fund managers, who specialize in navigating alternative investments.
  • Less regulation: While subject to regulatory oversight, alternative investment funds generally operate with fewer restrictions compared to traditional investment funds.
  • Requirements for accreditation: While not all alternative investment funds require investor accreditation, many are exclusive to accredited investors like institutions and high-net-worth individuals due to associated risk and complexity.
  • Higher risk-reward profile: Alternative investment funds tend to carry higher risk compared to traditional investments due to a lack of liquidity and transparency. That said, alternative investments also offer the potential for historically higher returns.
  • Closed-end structures: Some alternative investment funds have a closed-end structure, which means that there is a fixed number of shares or units; investors cannot redeem shares at will.
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