Although alternative investment funds have a number of benefits, investors should also be aware of some inherent risks. These investments are not available to everyone, and the initial investment requirement for many of these funds is quite high. There are also higher fees and expenses associated with alternative investments than with traditional stocks and bonds. Click here to get the benefits of investing and the associated risks. Another risk is counterparty risk. This refers to the risk that another business may be unable to meet its obligations. If a fund is making large investments in stocks or bonds, it may be exposing itself to losses if the counterparty fails to perform. For instance, in the summer of 2008, a hedge fund made a mistake by purchasing over-the-counter equity put options from Lehman Brothers. Lehman went under, and the hedge fund did not profit. Regulatory oversight is another major issue for these funds. As a result of recent economic crises, the European Union (EU) issued the Alternative Investment Fund Managers Directive (AIFMD). It aims to reduce systemic economic risks and protect EU investors by regulating alternative investment funds. Under the directive, AIFMs must prepare for regulatory filings that allow supervisors to monitor the fund's risk profile. Risks associated with Alternative Investment Funds include operational, counterparty, and liquidity risks. Because they are not directly related to traditional investments, investors should make sure they understand the risks associated with them before deciding to invest in them. Additionally, investors should consider their time horizon, risk tolerance, and overall investment objectives before deciding on an Alternative Investment Fund. Further, Alternative Investments typically offer higher returns than traditional investments, but this is not a guarantee. The other major risk for these funds is the exposure to a country or region. Most investments are correlated with country and currency exposure. The market can be volatile, and the risk may increase or decrease depending on the particular index and country in which the fund operates. While the market can be volatile, this factor is not the only concern. Alternative Investment Funds also have risks related to real estate. Investments in real estate may be subject to new regulatory developments, and properties may not be as attractive as they seem. The financial health of tenants may also impact the property's value. Other risky investments include managed futures, which may involve greater risk than traditional funds. These investments can result in significant losses if prices increase. Alternative Investment Funds are not suitable for everyone. However, they may be suitable for those with sufficient financial means and who are willing to bear some economic risk. Individual investors should always seek professional advice prior to investing. They should also understand that PIMCO does not provide legal advice. It is therefore important to understand the risks of Alternative Investment Funds before investing in any alternative fund, go to website for more insights about this topic. Besides calculating the risk of a fund, investors should also look into the volatility of the portfolio. Volatility-based risk measures are better suited to a relative analysis than absolute value. In other words, comparing the VaR of a single portfolio to that of the whole fund can help investors distinguish which aspects of a fund's overall investment program are most affected by market conditions. Check out this post that has expounded on the topic: https://en.wikipedia.org/wiki/Investment_management.
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