Alternative investment funds and innovative opportunities for investors

AIFs offer specialized opportunities and potential higher yields on investments. Yet, the ₹1 crore minimum investment requirement is an entry hurdle, attracting only sophisticated investors looking for a bespoke investment strategy. Over the previous seven years, the AIF category in India has increased tenfold, with assets under administration totalling ₹7 trillion, according to the Indian Association of Alternative Investment Funds (IAAIF). These investments often have a 10-year time horizon, necessitating financial advisors’ continuous engagement with investors to manage expectations.

Almost a decade ago, foreign institutional investors (FIIs) were financing India’s AIFs. However, there has been an ever-expanding pool of domestic investors that is now contributing to the industry’s growth. Compared to a decade ago, when overseas investors infused majority of the capital, almost 80-90% of funds raised today are from domestic investors. Current trends indicate that AIFs could become a huge industry in the future and get close to the size of India’s ₹46-trillion mutual fund industry.

AIFs encompass a spectrum of categories, each offering distinctive investment opportunities. Interestingly, each category can further evolve and offer more specialized investment opportunities to investors with the help of innovation. Here is how.

Real estate funds: Real estate funds offer a gateway to property markets without direct ownership. In an era of digital transformation, these funds are capitalizing on property technology (PropTech) for property management, virtual property tours, and data-driven location analysis. With the help of this technology, real estate funds could channel more resources into sustainable, affordable housing and smart city projects.

Infrastructure funds: The innovation in this category is likely to come from green infrastructure initiatives. As environmental concerns guide investment choices, infrastructure funds are likely to finance various projects around climate change. They can be highly influential in shaping the energy systems of the future.

Venture capital funds: Venture capital funds are crucial in nurturing early-stage startups. VC funds are utilizing data and artificial intelligence (AI) to identify promising startups and predict market trends. As this ecosystem evolves, these funds could use technology in not only identifying investment opportunities, but also scouting talent to guide the startups through their early stages of business cycle.

Hedge funds: From long-short equity positions to derivatives trading, hedge funds leverage market inefficiencies. Hedge funds can adopt AI and machine learning algorithms for high-frequency trading and risk management. These funds are poised to navigate to a landscape where technology and ethical investment principles get intertwined.

Fund of Funds (FoFs): These are an emerging category. Through this, investor can get a diversified exposure to AIFs. As data-driven investment gains prominence, FoFs could adopt AI-algorithms to make real-time portfolio adjustments and optimize risk-return profile of the portfolio.

One key factor driving the growth of the AIF industry is the expanding pool of domestic capital, spilling over into India’s tier II and tier II towns. Their participation in the growth of the startup ecosystem has been critical and has led to a lot of wealth creation. Despite the AIF ecosystem’s enormous expansion, distribution in India still remains expensive and difficult. While regulations have enabled asset management companies to launch AIFs without any hassles, distribution fees need to moderate so as to encourage the industry to facilitate a fully technology-driven onboarding of investors.

Aditya Kanoria is founder and managing director of Credent Global Finance

Updated: 31 Aug 2023, 11:07 PM IST