Imagine this — by 2025, one in every four dollars invested will be flowing into alternative investment funds.

Sounds surprising, doesn’t it?

But that’s precisely what a recent report predicts – a staggering 25% growth in the alternative investment space within the next three years.

Now, you might be wondering, “What exactly are alternative investment funds?”

Simply put, they are investment vehicles that fall outside the realm of traditional investments like stocks, bonds, and cash. We’re talking about things like hedge funds, private equity, real estate, commodities, and more.

As unconventional as they may seem, alternative investments have been gaining serious traction among investors, both institutional and individual. And this report, by a leading financial research firm, only reinforces the growing allure of these non-traditional investment options.

So, in this blog post, we’ll discuss the reasons that are fueling this anticipated growth and the advantages that make alternative investment funds an attractive prospect.

Overview of Alternative Investment Funds

Let’s start with a quick overview of alternative investment funds.

For the uninitiated, these are investment vehicles that operate differently from traditional investments like stocks and bonds. They typically involve more complex strategies and structures and often require higher minimum investments.

Some examples of alternative investment funds include:

• Hedge funds: These are actively managed investment pools that employ various strategies, such as long/short equity, global macro, and event-driven strategies.

• Private equity: These funds invest in private companies or acquire controlling interests in public companies with the aim of improving their operations and profitability before eventually selling them for a profit.

• Real estate funds: As the name suggests, these funds invest in various types of real estate properties, including commercial, residential, and industrial properties.

The key difference between traditional and alternative investments lies in their investment strategies, risk profiles, and liquidity.

While traditional investments tend to be more liquid and follow well-established patterns, alternative investments often involve more complex strategies, higher risks, and lower liquidity.

Despite these differences, alternative investments have become increasingly popular among investors seeking diversification, higher returns, and exposure to unique investment opportunities.

In fact, the demand for alternative investments has been steadily rising, particularly among institutional investors and high-net-worth individuals.

Reasons Behind the Anticipated Growth

So, what’s driving this phenomenal growth in alternative investment funds?

According to the report, several factors are contributing to the surge in popularity of these non-traditional investment vehicles.

Reason 1: Low-interest rate environment and the search for higher yields

In the current low-interest rate environment, investors are constantly on the hunt for investment opportunities that can generate higher returns.

Traditional fixed-income investments like bonds and savings accounts simply don’t cut it anymore, which is primarily what’s prompting investors to explore alternative investment strategies that offer the potential for higher yields.

Reason 2: Diversification and risk management strategies

One of the key advantages of alternative investments is their low correlation with traditional asset classes like stocks and bonds.

When you incorporate alternate investments into your portfolio, you can effectively diversify your holdings and potentially reduce overall risk.

Reason 3: Increasing wealth and demand from high-net-worth individuals

As the ranks of high-net-worth individuals continue to swell globally, so does the demand for alternative investment opportunities.

These affluent investors often seek out more sophisticated investment strategies and are willing to take on higher risks in pursuit of potentially higher returns.

Reason 4: Institutional investors’ appetite for alternative investments

Pension funds, endowments, and other institutional investors have been steadily increasing their allocations to alternative investments.

These sophisticated investors recognize the potential benefits of alternative investments, such as diversification, higher returns, and exposure to unique investment opportunities.

Reason 5: Regulatory changes and favorable tax treatment

In some jurisdictions, regulatory changes and favorable tax treatment have made alternative investments more attractive to investors.

For instance, in India, AIF funds in India have been given a specific regulatory framework and tax benefits, which has contributed to their growing popularity.

Advantages of Investing in Alternative Investment Funds

Now that we’ve explored the reasons behind the anticipated growth in alternative investment funds, let’s take a closer look at the potential advantages these investment vehicles offer.

1. Diversification benefits

One of the primary advantages of investing in alternative investment funds is the diversification they can provide to your portfolio.

Unlike traditional investments, which often move in tandem with the broader market, alternative investments tend to have a low correlation with traditional asset classes. This means that their performance is less likely to be affected by the same market forces that impact stocks and bonds.

That means when you include alternative investments in your portfolio, you can potentially reduce your overall risk exposure. If one asset class underperforms, the others may perform better, helping to offset losses and stabilize your portfolio’s returns.

2. Potential for higher returns

While alternative investments typically carry higher risks, they also offer the potential for higher returns compared to traditional investments.

Many alternative investment strategies aim to generate outsized returns by exploiting market inefficiencies, taking advantage of unique investment opportunities, or employing complex trading strategies.

For example, hedge funds often employ sophisticated strategies like short-selling, leverage, and arbitrage in an attempt to generate superior returns regardless of market conditions.

Similarly, private equity funds seek to acquire undervalued companies, improve their operations, and ultimately sell them at a significant profit.

3. Get opportunities you can’t find elsewhere

Investment funds that are not traditional can give you chances to invest in things that would be hard to invest in through normal investment options like stocks and mutual funds.

For instance, real estate funds allow you to invest in various types of properties, such as commercial buildings, apartment complexes, or even niche sectors like student housing or senior living facilities.

Similarly, private equity funds give you the opportunity to invest in private companies that are not listed on public exchanges.

These investments can offer significant growth potential, as private companies often have more flexibility and room for improvement compared to their publicly traded counterparts.

4. Hedge against inflation and market volatility

Certain alternative investments, such as commodities and real estate, can serve as effective hedges against inflation and market volatility.

For example, investments in precious metals like gold and silver have traditionally been used as a hedge against inflation, as their prices tend to rise when the value of fiat currencies declines.

Similarly, real estate investments can provide a hedge against inflation, as property values and rents tend to appreciate over time, keeping pace with rising prices. Additionally, some alternative investment strategies, like global macro funds, actively seek to profit from market dislocations and volatility, providing a potential cushion against turbulent market conditions.

5. Potential tax advantages

Depending on the jurisdiction and the specific investment structure, some alternative investments may offer potential tax advantages.

For instance, in some countries, certain alternative investment funds may be eligible for favorable tax treatment, such as lower capital gains rates or tax-deferred status.

However, it’s important to note that tax implications can be complex and vary depending on your individual circumstances and the specific investment vehicle. It’s always advisable to consult with a qualified tax professional before making any investment decisions based on potential tax benefits.

Conclusion

As we’ve learned, investments other than traditional ones like stocks and bonds are expected to grow a lot in the next few years.

The report anticipating a 25% surge in alternative investment funds by 2025 highlights the growing appeal of these non-traditional investment vehicles among investors seeking diversification, higher returns, and exposure to unique investment opportunities.

While alternative investments offer a range of potential advantages, including diversification benefits, the potential for higher returns, access to unique opportunities, and hedging against inflation and market volatility, they also come with significant risks and considerations.

If you’re interested in exploring the world of alternative investments, consider StepTrade.Capital – a leading platform that provides access to a diverse range of AIF funds in India.

With a team of experienced professionals and a commitment to transparency, StepTrade.Capital can help you navigate the complexities of alternative investments and find opportunities that align with your investment goals and risk profile.