What are Alternative Investment Funds (AIFs)?

What are Alternative Investment Funds (AIFs)?

Joel Colman

Joel Colman  -  21st May 2024

Are you thinking of expanding your investing horizons beyond stocks and bonds? Looking for strategies to boost returns and diversify your portfolio?

Turmoil in global financial markets have made this a common theme for investors, many of whom are turning to alternatives to achieve their goals. In this post, we shine the spotlight on alternative investment funds (AIFs) as a powerful weapon in your investment arsenal.

Understanding alternative investment funds (AIFs)

AIFs are collective or pooled investments – those where capital is raised by a number of investors – into alternative assets outside traditional classes of stocks, bonds and cash. As an investor, you’re not responsible for decisions about where or how your chosen fund’s assets are invested. Instead, AIFs have a defined investment policy under the direction of a fund manager.

AIFs offer access to a wide variety of asset classes – from property and infrastructure to private equity and debt – as well as a broad range of investing strategies. They’re incredibly varied, meaning you have the flexibility to choose a fund that’s aligned with your financial circumstances, goals, approach to risk and values, amongst other things.

Once restricted to accredited and institutional investors, AIFs are gaining traction amongst individual investors looking to diversify their portfolios and achieve higher returns. And the volatile terrain of the current investment landscape – think turbulent markets and high inflation – is acting as a catalyst.

Unlike traditional investment funds (such as exchange-traded funds) which are highly susceptible to economic downturns, AIFs have low or no correlation to stock and bond performance. And while they are generally viewed as riskier, they provide diversity and a hedge against inflation, thus reducing overall portfolio risk. Another key difference between traditional and alternative investment funds is that the former are highly regulated, while AIF regulation focuses on fund management companies rather than the products themselves.

The spectrum of AIFs: alternative investment fund categories explained

Before you invest, it’s crucial to be aware of the different types of alternative investment fund – and the advantages and disadvantages delivered by each. A good place to start is by developing your understanding of AIF categories, which we’ve summarised below.

Category I AIFs

Category I investments typically relate to economically or socially viable projects such as:

  • Venture capital funds – If you’re looking to maximise returns and have an aggressive appetite for risk, these funds give you the chance to invest in start-ups and emerging businesses with the potential for significant growth
  • SME funds – These give you the opportunity to invest in small and medium-sized enterprises with an established track record
  • Social venture funds – Environmental, social and governance (ESG) factors are a growing consideration for many investors – and social venture funds offers investments in social enterprises that prioritise society or environment as well as financial growth
  • Infrastructure funds – Encompassing roads and aviation as well as energy-based projects, these funds give you the opportunity to invest in a country’s infrastructure

Category II AIFs

Category II funds are growing in popularity, not least because of the increasing investor protection that some offer. This category includes:

  • Real estate funds – Property investments offer the potential for regular income (rent) as well as the chance to grow your capital over time (capital appreciation)
  • Private equity funds – A popular alternative fund, this gives you the chance to invest in unlisted private companies
  • Debt funds – With the potential for strong returns, growing numbers of investors are choosing debt funds including fixed-income bonds

Category III AIFs

Generally suited to high-net-worth (HNW) and institutional investors, category III AIFs include:

  • Hedge funds – Utilising a range of strategies – short selling and leverage, for example – hedge funds have the potential to generate high returns
  • Commodity funds – Investments in physical commodities such as gold and silver fall into this category, as do commodity futures and options

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Who can invest in AIFs?

Institutional investors are still the largest group of investors in the alternatives market. However, alternative opportunities are becoming more accessible, with many funds now aimed specifically at individuals. They’re particularly popular amongst high-net-worth and ultra-high-net worth individuals – the wealthier you are, more likely you are to invest in AIFs.

Notoriously opaque when compared to traditional markets, alternative investment markets were once regarded with suspicion. However, while they’re still far less heavily regulated than their traditional counterparts, shifts in the regulatory landscape are driving change.

In Europe for example, the Alternative Investment Funds Managers Directive (AIFMD) has established a regulatory framework for the AIF sector, albeit one that relates to alternative management companies rather than the funds themselves. What’s more, better investor protection and improved liquidity have made the alternatives market increasingly transparent.

Eligibility for AIFs varies widely – not just between funds but also geographically. Some AIFs – typically those with higher risk and return profiles – are still restricted to qualified investors. However, a growing number are available to those who meet minimum investment requirements. That said, due diligence before you invest is still crucial.

What strategic advantages do AIF investments deliver?

From diversification to risk mitigation and the potential for higher returns, AIFs deliver a multitude of benefits for astute investors. These include:

  • Diversification – When you spread your capital across a variety of asset classes and strategies, you’re effectively mitigating risk. Why? Simply, because if one asset class doesn’t perform as well as you’d hoped, the impact on your overall portfolio is minimised.
  • Risk mitigation – AIFs incorporate strategies that minimise risk – hedging techniques, for example. Plus, they include assets such as property and commodities, which tend to perform well in inflationary environments.
  • High returns – With a strategic AIF allocation, you have greater power to achieve high returns, regardless of financial market performance. Bear in mind too that sophisticated alternative strategies – going long or short, derivatives and leverage, for example – also come into play.
  • Access to experts – Alternative fund managers have a proven track record and extensive experience of the asset class in which they operate, so you benefit from their ability to maximise returns.
  • Flexibility – Incorporating a wide variety of asset classes and a huge range of risk-return options, AIFs give you the scope to customise your portfolio in line with your goals, interests and risk profile. What’s more, they give you access to specialised opportunities that aren’t available to traditional investors.

How can you navigate the challenges of AIF investing?

As with any investment, it’s vital to be aware of the risks and challenges associated with AIFs – and to conduct due diligence before you invest. Some factors to consider include:

  • Liquidity – Timeframes vary from fund to find, but typically alternative investments have longer time horizons and are less liquid that their traditional counterparts – if access to your capital is a priority, this is one to bear in mind.
  • Complexity – AIFs often have complex structures or leverage unique strategies, so it’s important to ensure that you understand the framework of your fund.
  • Minimum investments – One common feature of AIFs is their high minimum investment, which can be a restricting factor.
  • Regulation – The regulatory environment is shifting and fund management companies are now subject to regulation. However, alternatives are still less regulated than traditional investments.

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Your pathway to investing in AIFs

Interested in learning more about the benefits of investing in AIFs?

At Hays Mews Capital Alternative Investment Division, we leverage over 100 years’ combined experience of international finance to source top-tier alternative investment funds – primarily fixed-income bonds – for individual investors. With a meticulous approach to due diligence, only exclusive alternative investment funds from quality providers make it through our rigorous selection process.

What do we look for? Providers with a 100% track record on payments is a prerequisite – and we only consider companies with sound financial health, operating in a stable sector with the potential for growth. We’re not tied to a particular alternative asset type. Instead, we look for innovative and exciting products that deliver fixed yet high-yielding returns over a short term – and those that encompass robust security structures. (If you’re interested in finding out exactly how much you could earn, check out our investment calculator.)

It’s not just the products we source that differentiate us from other providers. We’re committed to exceptional service at every stage of the investment process – taking the time to get to know you to ensure that the product we recommend aligns with your goals and circumstances. From investment structures to payment schedules, we’re there to explain every aspect of the product to you, in depth. Ultimately, we give you access to dynamic, lucrative opportunities in the fixed-income space.

Frequently asked questions (FAQs) about alternative investment funds

Is AIF a good investment?

Alternative investment funds offer the potential for higher returns than traditional investment funds and bring diversity to your portfolio. However, they are often associated with higher risks. As a result, it’s important to ensure you conduct thorough due diligence before you invest.

What is the difference between a hedge fund and an alternative investment fund?

Alternative investment fund (AIF) is the generic term for a collective investment in alternative asset classes in accordance with a defined investment strategy. Hedge funds are a specific type of alternative asset fund where a fund manager utilises alternative investment strategies to invest in a variety of asset classes.

What is the difference between mutual fund and alternative investment fund?

Both are built from a collective investment pool with the aim of increasing returns. However, a mutual fund is a traditional regulated investment product, while alternative investment funds invest in a variety of alternative asset classes and are generally associated with higher risks.

What is the difference between UCITS and AIFMD?

Undertaking for Collective Investments in Transferable Securities (UCITS) is a regulatory framework for mutual funds in the EU. Alternative Investment Funds Managers Directive is a regulatory framework for companies managing AIFs in the EU.

How do alternative funds work?

Alternative funds are a collective investment vehicle. Typically managed actively, alternative investment fund managers use a variety of strategies – which can include leverage, derivatives and short positions – to boost returns for investors.

Are alternative funds risky?

Alternative funds are generally considered riskier than traditional funds as they offer the potential for higher returns. Conversely, they are often used strategically to diversify and therefore lower the overall risk of a portfolio.

What is the minimum amount in AIF?

While alternative investment funds typically have a higher minimum investment requirement than traditional funds, there is no set fixed minimum investment amount.

Joel Colman
Joel Colman

Joel Colman

Co-Founder Director

I’d love to answer your questions about how AIF investing will bring stability, growth and diversity to your portfolio. Book a no-obligations chat with me using the link below.

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