Alternative Investment Features, Methods, and Structures

What makes an investment 'alternative', the three big categories (private capital, real assets and hedge funds), the three ways to get in (fund investing, co-investing and direct investing), and the ownership and pay structures (limited partnerships, side letters, management and performance fees, hurdles, catch-ups, high-water marks, clawbacks and waterfalls) that hold manager and investor together over many years.

1. 1. What makes an investment alternativeAlternatives are everything outside public shares, bonds and cash; investors buy them for diversification and higher expected returns, and pay for that with illiquidity, long horizons, big tickets, specialist skills and more complex structures and fees.Free12 min
2. 2. Private capital and hedge fundsPrivate capital funds companies outside the public markets, as equity (private equity, including venture capital for start-ups) or as debt (private loans, venture debt, distressed debt), while hedge funds are defined not by what they own but by how they invest.12 min
3. 3. Real assets: real estate, infrastructure, natural resources and moreReal assets are mostly tangible things, such as buildings, land, toll roads, forests and commodities, that either produce cash flows or store value, joined by collectibles and intangibles like patents and digital assets.13 min
4. 4. Three ways in: fund investing, co-investing and direct investingInvestors move along a path from fund investing (outsource everything, pay the highest fees) through co-investing (invest alongside the fund at lower fees) to direct investing (full control, lowest fees, but full responsibility for skills and oversight).Video · 5 min14 min
5. 5. Ownership structures: limited partnerships and beyondMost alternative funds are limited partnerships, in which a general partner runs the fund with unlimited liability and passive limited partners commit capital with liability capped at their investment, all governed by a limited partnership agreement that side letters can tailor for individual investors.13 min
6. 6. Compensation: fees, hurdles, catch-ups, clawbacks and waterfallsAlternative managers earn a management fee plus a performance fee on returns above a hurdle, and a set of adjustments (catch-up clauses, high-water marks, clawbacks and the choice of waterfall) decides how much of the profit the GP really gets and when.Video · 6 min15 min