Alternative investment funds (AIFs) are generally targeted at professional investors and have few restrictions on the type of assets they hold. This means they can offer greater diversification as well as the prospect of higher returns, but they also come with downsides, including higher risk and a potential lack of liquidity.
Recent years have seen an increased focus on alternative investments as an asset class and the net asset value of Irish-domiciled funds regulated as AIFs continues to grow. But what does alternative really mean when it comes to these types of funds?
According to Michael MacGrath, head of global investment selection with Davy, the concept of an AIF is a very broad one.
“AIFs are, broadly speaking, collective investment funds which fall outside the UCITS [Undertakings for Collective Investment in Transferable Securities] regime,” he explains. “While UCITS funds have a range of requirements around liquidity and diversification, and are mainly designed with retail investors in mind, AIFs can hold illiquid assets or more concentrated portfolios, with fewer investment restrictions.”
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That opens up a much wider range of investment options, he points out; AIFs could, for example, simply invest in liquid equities or bonds, or they can invest in real estate, private equity, private credit or other illiquid investments.
“But, as a result, the label AIF doesn’t imply anything about a fund’s investment programme and investors need to look below the bonnet to understand what types of assets the fund owns and what type of risk the fund is running, or any restrictions that may apply in terms of withdrawing capital,” MacGrath warns.
Laura McKeown, partner in financial services and international tax with PwC Ireland, notes that AIFs offer considerable structural flexibility, accommodating a wide range of strategies and asset classes beyond traditional equities and bonds.
“AIFs are regulated under AIFMD which provides robust investor protection, clear governance standards and oversight,” she says. “The main advantages for investors are the potential for higher returns. The downsides are higher running costs, more reporting and compliance, typically less liquidity and higher minimum investment thresholds than ETFs [exchange traded funds] or mutual funds.”
AIFs support a broad universe of strategies, including private equity, private credit, infrastructure, real assets, and hedge fund strategies. McKeown explains they can be structured as open-ended or closed-ended, with or without leverage, and tailored to either liquid or illiquid underlying assets.
“In Ireland, the ICAV [Irish Collective Asset-management Vehicle] and more recently the Investment Limited Partnership (ILP) are the most widely used vehicles, each offering distinct advantages depending on the investment strategy and target investor profile,” she says.
But only a subset of AIFs is accessible to retail investors, and many are restricted to professional investors or require minimum investment sizes. “For smaller portfolios, investors are less likely to need the flexibility of an AIF: below a certain scale, investors are typically best served by funds in the UCITS space,” MacGrath says.
“For larger portfolios, a combination of the two types of funds may work well – for example, supplementing a liquid UCITS portfolio with targeted allocations to AIFs which can provide highly differentiated exposures.”
Appropriately sized allocations to real estate or infrastructure assets can also provide an avenue for returns generation when other asset classes are challenged.
“AIFs are primarily designed for professional and institutional investors, including pension funds, insurers, sovereign wealth funds, and family offices, who can commit meaningful capital and tolerate illiquidity for long-term returns,” McKeown adds. “Typically, these structures have a €100,000 minimum subscription.”
Ireland has firmly positioned itself as a premier location for private assets, McKeown says, driven by its access to the EU market, regulatory and tax landscape, and an extensive ecosystem of service providers. “Ireland operates within the EU’s pan-European regulatory framework and as such is bound by the same overarching regulation as other EU jurisdictions, albeit there can be different interpretations across the bloc in certain areas.”
She also points out that Ireland has a robust regulatory framework that provides market certainty and investor protections. “This coupled with a pragmatic approach can be a differentiating factor, the Central Bank of Ireland’s 24-hour authorisation process for qualifying investor AIFs is a notable example of this, enabling managers to bring strategies to market quickly.”
