The first decade of this century ended with a deep financial crisis which forced regulators across the globe to increase their focus on the alternative investment valuation, those fields that followed no rules and practices till then.
This has started the opening of standards such as the Alternative Investment Fund Managers Directive (AIFMD) and other strict responsibilities around valuation issues.
What does alternative investment mean?
It is a monetary investment that doesn’t fall into one of the classic asset classes. Traditional categories include stocks, bonds, and cash. Alternative assets are authentic and have many outcomes, such as real estate, art and antiques, articles, derivative warrants, hedge funds, controlled futures, private equity, and active capital.
Types of alternative investments
1] Real Estate
Real estate can be among the most promising financial instruments that include allocation in physical properties or property-based securities, such as real estate mutual funds, real estate crowdfunding platforms, and real estate investment trusts. In addition to capital appreciation of tangible assets, investors seek operational income to provide a potentially steady, regular cash flow.
2] Commodities
Raw materials such as gold, silver, oil, or agricultural products can be some products that come under commodities. If you are an investor, you can put your money in these substantial assets that have real-world significance and often maintain their direction in the market due to the underlying factors of what they are.
3] Farmland
Farmland is a combination of both commodities and real estate. Farmland can be a good and sound alternative investment for investors. Besides the benefits of physical land, investors will also receive continuous cash returns when the processes and deals of commodities yield positive results.
What is carried interest?
Carried interest is a way of improving returns earned by general partners of private equity, hedge funds, and venture capital. The carried interest valuation is calculated, and due amounts are distributed to the other partners for their effort in achieving the profit. The profit is not based on the initial investment they made in the fund.
However, the carried interest can only be settled when the fund gets the lowest return, known as the hurdle rate. Carried interest naturally receives treatment as a long-term capital gain taxed at a lower rate than normal income.
Hedge fund carried interest is one of the core allocations to alternative assets and can provide strong, risk-modified returns, boosting the value against equity risk. Hedge funds have structural benefits in a higher interest rate environment. High interest rates are concerned with higher market fluctuations, which is generally good for unconstrained active management and presents a better opportunity set for shorting. Hedge funds have the possibility to generate strong risk-adjusted returns, adding value to portfolios as an alternative to equity risk.
Conclusion:
High interest rates, strict rules, and documentation in the central banks are forcing investors to seek alternative investments.
Carried interest is a prominent primary source of payment for the general partner. The general partner (GP) allocates the profits to the other members through the fund’s directors. Some of them charge a 2% annual management fee. Every investor can earn carried interest only if the funds reach the pre-agreed minimum return.
