Alternative investments refer to assets and strategies outside the traditional asset classes of stocks, bonds and cash. Common alternative investments include private equity, hedge funds, real estate, commodities, and derivatives. Unlike traditional investments, alternative investments often have complex fee structures and withdrawal policies that investors need to understand before investing.
High management fees for alternative investments
Alternative investments like hedge funds and private equity typically charge annual management fees of 1-3% of assets under management, which are higher than fees for traditional mutual funds and ETFs. These fees compensate the fund managers and cover operating expenses, but reduce net returns to investors.
Performance fees take a share of profits
In addition to management fees based on assets, many alternative investment funds also charge performance fees, usually 15-25% of any trading profits or beating a certain benchmark. So investors have to give up a substantial share of profits to the fund managers.
Lock-up periods restrict access to capital
Unlike liquid investments that allow daily trading, many alternative investments have lock-up periods that prevent investors from withdrawing their capital for months or years at a time. This reduces flexibility and requires long-term commitment from investors.
High minimum investments limit smaller investors
Hedge funds and private equity funds often have high minimum investments, sometimes into the millions of dollars. This puts alternative investments out of reach for many smaller retail investors, restricting them to high net worth and institutional investors.
Alternative investments can charge higher fees and place more restrictions around withdrawals compared to traditional investments. Investors need to factor these costs and policies into decisions before allocating capital.