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What are Alternative Investments?

Alternative investments (AI) are innovative investment strategies and concepts that serve to better diversify and optimize the portfolio's risk-return structure. They are becoming an indispensable component of capital investment, especially with institutional investors such as insurance companies or pension funds, as well as High-Net-Worth-Individuals.

10. November 2016

The term is often associated with infrastructure or private equity, but the field of AI also extends to private debt, real estate, hedge funds or commodities, as well as many other specialties such as aircraft or ship financing and crypto-assets. Since there is no universally recognised definition, there are various interpretations. BAI defines AI as investing in non-traditional asset classes (other than equities and bonds) or investing in these asset classes using complex, non-traditional strategies.

A clearly distinctive classification of the individual classes is often difficult. Hedge funds, for example, can be categorized according to asset classes and strategies, but their common denominator is often the nature or timing of the investment. What unites the asset classes and strategies is the fact that they contribute to a significant improvement in the risk / reward ratio with appropriate portfolio allocation. In addition to the diversification effect, there are other features that characterise alternative investments.

Private Equity
Private Equity, or PE, is a collective term for all types of investment in the equity of unlisted companies (corporates). PE funds, which are managed by asset managers, collect capital from investors and then successively invest it in individual target companies. The role of asset managers is to identify suitable transactions, analyse them, negotiate and conclude contracts with the target companies and, as a rule, also to support the management of the target company. This support can help to optimise the financed company in organisational and structural terms. When investing in PE, a distinction is made between different investment phases and investment structures, each of which is subject to specific return and risk aspects. Venture capital is considered one of the forms of PE.
Fact Sheet (in German)

Private Debt
Private debt refers to the provision of capital by non-banks without involving the capital market. Non-banks are, for example, private debt funds in which institutional investors invest their capital. Private debt is basically a rather illiquid form of investment. Private debt is of particular benefit to those who seek capital that is not sufficiently financed by banks, especially medium-sized companies with a medium credit rating. The private debt spectrum is very heterogeneous. In particular, it includes debt investments in companies (corporate private debt), but also lending for infrastructure projects, real estate and other tangible assets (such as aircraft). The risk-return profile of private debt investments depends not only on the purpose of the financing, but above all on the loan tranche selected. A distinction must be made here in particular between senior and subordinated loans.

FactSheet (in German)

Real Estate
Real estate investments are among the central allocation components in the portfolios of institutional investors as they contribute to diversification and thus to minimising the risk of the overall portfolio. Investments can be made by direct investment or through specialized real estate funds. In addition to the use of equity capital, access to debt capital is essential for the real estate industry in particular to implement investment projects. Segments of this asset class are residential, office, retail, industrial, logistics and hotel properties as well as other special-purpose properties (e.g. nursing homes, hospitals, educational facilities, etc.).
Fact Sheet (in German)

Infrastructure Investments
Infrastructure investments take many forms. They differ particularly in terms of sectors, project phases and strategies and allow a wide variety of risk/return profiles. Examples are transport and traffic infrastructure (e.g. toll roads or railways), publicly regulated energy and water supply, communication infrastructure (e.g. mobile or satellite communications) and renewable energies. Social infrastructure includes hospitals as well as educational and cultural institutions. Depending on the project phases, there are newly implemented greenfield projects and brownfield projects that build on infrastructure that has already been developed.
Fact Sheet (in German)

Hedge Funds
A hedge fund is an investment fund that invests using sophisticated, non-traditional strategies. To achieve absolute returns in any market environment, hedge fund managers use leverage and short positions. Ultimately, hedge funds can be said to invest in traditional asset classes (such as equities and bonds), but through the use of alternative strategies.
Fact Sheet (in German)

Specialities include special forms of alternative investments such as Insurance Linked Securities (ILS) and innovative crypto-assets. Commodity investments and investments in alternative real assets such as aircraft and ships can also be assigned to the specialities of alternative investments. The field of specialties also extends to numerous other niche themes such as art, instruments, vintage cars or whisky.
Fact Sheet (in German)

Commodity investments include a multitude of heterogeneous investments, which are traditionally precious metal, industrial metal, crude oil, natural gas or agricultural commodities. As a consequence of the heterogeneity of the commodity sector, there are certainly different ways to categorize raw material (commodities). You can categorize them for example by the type of use or whether they can be consumed directly or they are to be used in the manufacture. Another possibility is the distinction between hard and soft commodities. Hard commodities are not renewable raw materials which are characterized by their limited availability. Soft commodities are renewable perishable commodities.