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Alternative investments

Why are Alternative Investments Trendy?

Investors have been looking for profit and suitable investments for years. Are there alternatives to low interest rates? This approach is followed by the definition of alternative investments: these are investments which differ significantly from traditional, conventional money investments such as funds and easy-to-use financial assets such as shares, bonds or real estate. However, there is no uniform definition for this.
What are alternative investments?

They are not a separate asset class, but innovative investment products. These are characterized by exceptional potential for return on investment, complexity, a complex performance analysis and risk measurement as well as the use of leverage products and derivative financial instruments. These bonds are associated with less transparency and low liquidity. Nevertheless, they are well suited to optimize the return on a portfolio with a given risk structure. In addition, the risk can be reduced with the same returns. They are an excellent instrument for portfolio allocation and can significantly improve their risk / return ratio. Alternative investments have the advantage that they are hardly correlated with conventional investment forms and thus enable better diversification. This includes the following investments: the Federal Association of Alternative Investments (BAI):

Hedge funds
Private equity
Real Estate
Infrastructure projects such as transport, transport, water, health, mobile radio, educational facilities, renewable energies
Commodities / commodities such as precious metals, industrial metals, oil, gas, agricultural raw materials
Other alternative investments such as art, antiques, forest, wine.

What is behind the investment?

Hedge funds are actively managed investment funds, which invest in traditional asset classes, but use unconventional, divergent and highly complex investment strategies to achieve their return on investment. They use leverage for investment and trading purposes. Hedge funds use market incentives and price differences as well as event-related strategies and microanalyses for yield maximization.

For example, hedge funds speculate on falling stock markets by borrowing shares from index funds in order to return them at a later date more favorably. This category also includes managed futures / CTAs. Managed futures are special hedge fund investment instruments that, like the US commodity trading advisors, invest as regulated asset managers exclusively in futures markets such as futures and options.

Private equity means that equity is provided by investors over the counter. In contrast to equity capital, this form of investment cannot be offered and sought in a regulated market such as the stock exchange. The reason is that the companies are not listed on the stock exchange.

The investor often buys the company shares with a high quota of borrowed capital, for example bank loans or bond issues, or with the aid of private equity funds. The aim is to achieve future high distributions or a considerable return through the subsequent sale of the company’s participation. Capital is invested in company formation, in the growth phase, during turnaround or takeover. In start-ups, private equity is referred to as venture capital because of the higher risk.

The real estate sector invests directly or indirectly in real estate in order to generate a financial return. In the meantime, there are numerous forms of alternative real estate investments, such as closed funds and special real estate funds. These, in turn, invest in real estate or in shares of real estate companies and REITs. REITs are corporations that generate profits from the leasing, leasing and sale of real estate and land. Alternative investments include crowding investment for real estate, which allows attractive yields to be realized in the short term by property developers.

However, REITs might conceive significant risks and very high fees for the investors. If you are interested please read our part of the glossary Why not REIT.

How are Alternative Investments Developed?

Alternative investments are no longer the domain of institutional investors, they are increasingly interested in private investors and small investors. Current customers, for example, can participate in life and annuity insurance. As the promised guarantees are more difficult to generate due to the long-term low-interest phase, the insurance companies are increasingly investing in infrastructure investments and real estate. The high growth of investments in alternative investments in the last decade is undisputed. In 2005, assets invested in Alternative Investments were $ 3.2 trillion worldwide, while in 2013 it was $ 7.9 trillion. With steady growth, around 15.3 trillion dollars of assets under management will be invested in alternative investments in 2020, according to PwC, the auditing firm. Approximately 14 percent of the total assets under management will then be invested in alternative investments.

Secure paper no longer raises positive returns, investors need to take risks for higher profitability. The zero interest rate policy of the ECB has led to negative interest rates for investors in government bonds and savings banks. This results in plant pressure, which gradually opens up new investment forms with lucrative returns. In addition, equity investments are subject to high volatility and uncertainty about future price developments. Thus, it is not an option for all investors. Furthermore, the close interweaving of the global markets has the effect that the development of the value of classical money investments is temporarily similar. This makes the optimal diversification of a portfolio considerably more difficult.

For private investors, the regulatory measures since 2010 have created better conditions for making investments in alternative investments. Thus, the establishment of the crowdfunding industry allowed small investors to acquire selected investments. Investments in high-yield properties do not require a large fortune to participate directly in the profits, thanks to crowding. By collecting many small amounts through a Crowdinvesting platform, attractive objects can be funded jointly. This allows small investors not only to avoid the negative interest, but also to divide their money intelligently. They thus have different investments which are not related to the development of traditional financial investments. These can more effectively protect against high losses in periods of crisis.