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What is an alternative fund and why consider investing in one?

3 June 2019

Connection Capital has a very focused aim – to provide experienced HNW private investors with direct access to a wide range of alternative investments via our platform. This allows our clients to invest in private equity, private debt, commercial real estate and alternative asset funds - the four core elements in our alternative investment product range.

Our reasoning for offering alternative asset funds alongside direct investments is two-fold. Firstly, diversification from traditional asset classes. As institutional investors pay increasing attention to alternatives (and more recently, as volatility buffets public markets), more and more private investors are investigating the benefits of alternative investments as they seek out greater portfolio diversification away from quoted equities and bonds. For many investors, funds are the most obvious route in.

Secondly, diversification within the alternatives spectrum itself. For investors who already invest in direct deals (such as the opportunities we present to clients), offering a diverse range of alternative asset fund options enables these investors to spread their holdings of alternatives even more widely, benefitting from further portfolio diversification.

To help existing and prospective clients better understand where an alternative asset fund might sit in their portfolio mix and to weigh up the pros and cons of such a move, it may be useful to explain what we mean by an alternative fund and why private investors might want to consider investing in one, alongside more mainstream, traditional types of investments like quoted equities and fixed income bond products.

Mainstream vs alternative asset funds

Alternative asset funds are very different from mainstream quoted asset funds in structure, not just in content.

There is a vast range of mainstream funds available in the marketplace, both in passive and active strategies. Equity fund strategies are available across a broad spectrum ranging from micro to large cap and style bias from deep value to growth and blends in-between. The style choice for the investor depends on risk appetite and investment time frame.

Similarly, for bonds, a wide variety of fixed income strategies are on offer from low risk low yielding government bond funds to higher risk and hopefully higher yielding strategies, such as emerging markets or high yield bond funds. Because these funds are open-ended and invest in mainly liquid assets, investors can take a relatively flexible approach to entry and exit.

The alternative asset fund universe covers a wide variety of asset types and strategies, from capital start-up venture capitalist funds to private equity growth and buy-out strategies, hedge funds and private debt funds to litigation funding, commercial property funds and more esoteric options like art, fine wines and music royalties – though individual funds will typically specialise in just one sub-set.

Many of these have the benefit of being uncorrelated to mainstream quoted assets, providing a useful hedge against volatility in public markets.

Alternative asset funds are usually closed-ended and are therefore, often illiquid. As investment in and returns from alternative assets often take some time to realise (e.g. property), fund managers need to ensure that funds are structured in the most appropriate way for the underlying assets. Clients may not be able to access their capital during the life of the fund (often several years), but some strategies (such as private debt funds with underlying cash generative assets) will pay investors a coupon along the way.

Levels of risk and reward differ too, and of course the two go hand in hand. In the alternatives arena, for us, opportunities must target at least 10% as a minimum: 10-30% internal rate of return (IRR) is the typical range we are looking at. Hence, private investors must have the right risk profile, financial capability and level of experience to participate: retail investors need not apply.

 

Funds vs direct investment in alternative assets

At this point, investors who are accessing alternatives direct (rather than through a fund) may be asking: why bother with a fund?

The answer is that we offer funds in order to add another dimension to the portfolio diversification options available to private investors. Since funds provide a single route into a wider pool of investments in a specific sector, managed by experts, their role as a diversifier within the alternatives space is clear.

However, alternative asset fund investments have traditionally been just as out of reach to individuals as direct investments. We open those lines of access: our clients can choose to invest direct or via a fund – or both.

For us, alternative asset funds should complement, not compete, with other Connection Capital product lines and our philosophy and criteria in selecting funds is the same as for direct investments, i.e. funds must:

  • Have an edge – offering something different which will truly add value for our clients, i.e. accessing an institutional fund with a high minimum investment entry level usually at least £1m but can be in excess of £10m, we provide access for a minimum ticket size of £25k operating in a niche area
  • Demonstrate top-class expertise and professionalism: the fund manager should have an excellent track record in their specific field Be relatable – clients must be able to easily understand what the opportunity is and the nature of the risk-adjusted returns
  • Supplement our existing portfolio to ensure clients are shown a balanced range of opportunities

An attractive choice

Of course, every investor is different, and our aim is to cater for a variety of individual needs, empowering clients to create an investment portfolio that is truly diversified and suitable for their unique goals and risk profile.

Within the alternative asset funds space there are a huge range of different strategies, each of which will yield different outcomes, so it’s vital that investors have a good choice of high-quality options. That’s always been our ethos, and by offering funds as well as direct investment opportunities, that choice is wider than ever.

 Russell O'Connor
07760 282 586 or Email

Woolverstone House,
61-62 Berners Street,
London, W1T 3NJ, United Kingdom
020 3696 4010