ALTERNATIVE INVESTMENT FUNDS

Made By:Tarunpreet SinghNatasha SharmaSajal MarwahTejinder KaurVarun SrivastavaHarshita TalrejaPrashant Vohra

INTRODUCTION

An investment that is not one of the three traditional asset types stocks, bonds and cash. It includes : Hedge funds Managed futures Private equity Currency funds Venture capital funds commodities and derivatives contracts.

BENEFITS OF AIF:

Returns have a low correlation with those of standard asset classes

Tool to reduce overall investment risk through diversification

Limited regulations, helps small companies.

WHO INVESTS…..???

IndividualsQualified Eligible PersonsAnd Sophisticated Investors

CATEGORIESi. Category I AIF – Category 1 includes those funds which shall include

Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds and such other Alternative Investment Funds as may be specified. These funds shall be close ended, shall not engage in leverage and shall follow investment restrictions as prescribed for each category..

ii. Category II AIF –Category 2 includes those AIFs which have no specific incentives or concessions are given by the government which shall not undertake leverage other than to meet day-to-day operational requirements as permitted in these Regulations; and which shall include Private Equity Funds, Debt Funds. These funds shall be close ended.

iii. Category III AIF –. These funds can be open ended or close ended. Category III funds shall be regulated through issuance of directions regarding areas such as operational standards, conduct of business rules, prudential requirements, and restrictions on redemption, conflict of interest as may be specified by the Board.

FEATURES

• The fund or any scheme of the fund shall not have more than 1000 investors.

• Category I and II AIFs shall be close-ended and shall have a minimum tenure of 3 years. However, Category III AIF may either be close- ended or open-ended.• Schemes may be launched under an AIF subject to filing of information memorandum with the Board along with applicable fees.• The Regulations provide for transparency and disclosures and mechanism for avoidance of conflict of interest.• Schemes may be launched under an AIF subject to filing of information memorandum with the Board along with applicable fees.• The Alternative Investment Fund shall not accept from an investor an investment of value less than rupees one crore.

SME FUNDS

SME is the funding of micro, small and medium sized enterprises development act 2006, and represents a major function of the general business finance market – in which capital for different types of firms are supplied, acquired, and costed or priced.

CONDITIONS THAT APPLY TO SME FUNDS

Atleast seventy five percent of the corpus shall be invested.

• SME funds may enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue.

• SME funds shall be exempt from regulation.

 MAIN OBSTACLES TO SME FUNDING

• Lack of satisfactory business plans, accounting and other information.

• Inadequate assets for use as security.• Insufficiently high levels of profitability,

gearing, liquidity, stability.

IMPORTANCE OF SME FUNDS

• Collateral based lending offered by traditional banks and finance.

• Information based lending usually incorporates financial statement lending, credit scoring, and relationship lending.

• Viability based financing is especially associated with venture capital.

• Reliable for all the small ticket loan.

Currency FundCurrency funds. It involves variety of currency contracts or the constant monitoring of two or more countries and all types of investors can benefit from the simplicity and convenience currency funds offer. After all, a single investment in a currency fund may provide benefits including diversification, professional selection and simplicity.

Benefits of Currency FundsConvenience  - Simplicity – Low Cost –Diversification – Professional selection .Currency Funds Achieve Exposure To Currency by : various instruments – forwards and futures-swap contracts .

Active Or Passive- : ->Managed currency Funds - requires active investment strategy-Portfolio Manager to do PM and make buy & sell decisions.->Passive currency funds are designed to track a predefined index or investment strategy and are not subject to the discretion of a portfolio manager. Strategies: Adjusting Portfolio Risk & Reward-Speculation- Hedging

Instruments

Spot Exchange: contract identifies two parties, the currency they are buying or selling and the currency they expect to receive in exchange. The currencies are exchanged at the prevailing spot rate at the time of the contract. When a spot exchange is agreed upon, the contract is defined to be executed immediately.

Forward Exchange: are settled at a specified date in the future. The parties exchange funds at this date. Forward contracts are typically custom written between the party needing currency and the bank, or between banks.The time period of the contract is significantly longer. These contracts use a forward exchange rate that differs from the spot rate. The difference between the forward rate and the spot rate reflects the difference in interest rates between the two currencies.

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Currency futures are standardized forward contracts. The amounts of currency, time to expiry, and exchange rates are standardized. This contract can be purchased on an exchange, rather than custom negotiated with a bank like a forward contract. 

A currency swap is an agreement to exchanges two currencies, one on a spot and one on forward. An immediate spot exchange is executed, followed later by a reverse exchange. The two exchanges occur at different exchange rates. It is the difference in the two exchange rates that determines the swap price

Currency Futures and Swap Transactions:

VENTURE CAPITAL

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.

Venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership

Venture capitalists

A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.

A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns.

Structure

Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm's managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called funds of funds

Need of venture capital

There are entrepreneurs and many other people who come up with bright ideas but lack the capital for the investment. What these venture capitals do are to facilitate and enable the start up phase.

When there is an owner relation between the venture capital providers and receivers, their mutual interest for returns will increase the firms motivation to increase profits.

Venture capitalists have invested in similar firms and projects before and, therefore, have more knowledge and experience. Therefore, through venture capital involvement, a portfolio firm can initiate growth, identify problems, and find recipes to overcome them.

Private Equity

Private Equity Overview: Private equity funds are investment companies that, as a rule, do not hold publicly-traded securities.

Instead, they normally seek equity stakes (that is, partial ownership) in private companies. They also may invest in so-called private placements of securities from public companies. That is, securities that are not offered to the general public or traded in the public securities markets

Capital for private equity is raised from retail and institutional investors, and can be used to

fund new technologies, expand working capital within an

owned company, make acquisitions, or to strengthen a

balance sheet.  

Types of PE

Investment strategies

Angel

Venture &

growth capital

Leveraged

buyouts

Overview of current conditions

India saw the largest increase in deal activity among the big Asia-Pacific markets in 2010. Although still far below the 2007 peak of US$17 billion, last year’s total deal value more than doubled from that of 2009 to US$9.5 billion, including venture capital, infrastructure PE investments and real estate investments.

India’s PE and VC industry is far from reaching its full potential. The biggest barrier holding it back is lack of regulatory support. Indian policymakers still do not regard PE and VC as a distinct asset class, nor have they given sufficient attention to creating a regulatory environment more conducive to the industry’s growth.

Hedge Funds

Privately Managed Fund HNIs Positive + Relative Returns Structure Income of HF Managers Investment of HF Managers

Hedge Funds Strategies

Distressed Securities Equity Market Neutral Merger Arbitrage Emerging Markets Convertible Arbitrage

Tools of HF Managers

Short-Selling Leverage Hedging Arbitrage

CONCLUSION Investments if not properly researched won't amount

to good investments at all. The main purpose of making an investment is of course earning of profit.

It is not the product that is called good investment but it is the strategy, timing and risk management that must be considered when you are in search of a good investment

Alternative investments prove to be excellent as they help minimize the risk by taking measures and can be diversified easily.

Few regulations imposed with a view to systemic stability, increasing market efficiency, encouraging formation of new capital and consumer protection.