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Subject 2. Investment Methods PDF Download

Investors can access alternative investments in three ways.

Fund Investing

The investor contributes capital to a fund which makes investments on the investor's behalf.

Advantages:

  • access to fund manager's services and expertise;
  • passive management;
  • diversification;
  • less capital required.

Disadvantages:

  • need to pay for funds' services (fees);
  • too many funds to select from: due diligence required.

Co-Investing

The investor invests in asset indirectly through the fund, but also possess rights to invest directly in the same assets.

Advantages:

  • can learn from fund's process for better direct investing;
  • reduced fees;
  • more active management of the portfolio and deeper relationship with the manager.

Disadvantages: a bit of in between fund investing and direct investing.

Direct Investing

The investor makes a direct investment in an asset without using an intermediary.

Advantages:

  • cost efficient (no management fees to pay);
  • great flexibility;
  • highest level of control over how the asset is managed.

Disadvantages:

  • requires management expertise;
  • lack of diversification;
  • less access to a fund manager's sourcing network;
  • requires greater levels of due diligence due to the absence of a fund manager;
  • higher capital requirements.

Investors conduct due diligence prior to investing in alternative investments. The due diligence approach depends on the investment method.

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