Investment in Alternative Investment Funds (AIFs) in emerging markets: An exciting opportunity
Vikas Jain
by Vikas Jain
Alternative Investment Funds (AIFs) have gained a robust popularity, particularly in emerging markets, highlighting a drastic shift in the global investment landscape. Emerging markets provide significant opportunities to expand and diversify investments on a continuous basis and thus have become a preferred choice for institutional and high-net-worth investors looking for high returns on their capital. AIFs also play a crucial role in promoting economic growth, further widening the scope to generate higher returns.
Understanding AIFs
Private equity, hedge funds, venture capital, and real estate funds are few of the many investment vehicles that are included in AIFs. AIFs have many advantages over conventional investment vehicles like equities and mutual funds, such as the capacity to produce better risk-adjusted returns, access to specialised markets, and flexibility in investing methods. Further, since these funds are not as heavy regulated as conventional investment vehicles, fund managers are able to apply unique strategies to maximise returns.
The appeal of emerging markets
Emerging markets are characterised by their dynamic economies, youthful populations, and rapid industrialisation. Most importantly, these economies generally grow at a rate much higher than most developed economies, thus providing several opportunities to compound returns. Several countries in Asia, Africa, and Latin America are some of the economies which provide significant scope for investments in sectors such as technology, renewable energy, infrastructure, and consumer goods. These economies are also leveraging digital advancements and policy reforms to attract foreign capital.
Index
5-yr CAGR return
10-yr CAGR return
20-yr CAGR return
5-yr rank
10-yr rank
20-yr rank
S&P 500
13.4%
11.1%
7.4%
3
1
5
Nifty 50
15.3%
11.0%
13.3%
2
Brazil
3.2%
10.0%
8.7%
9
Taiwan
17.9%
8.2%
6.9%
4
6
S. Korea
4.0%
2.5%
8.8%
8
10
China
1.5%
11
Australia
4.7%
3.8%
7
Canada
8.6%
6.0%
5.3%
Hong Kong
–6.2%
–2.0%
1.8%
12
France
3.0%
5.5%
Germany
7.5%
7.1%
8.0%
Japan
10.4%
8.1%
6.5%
The table provides a glimpse of how returns generated by Nifty 50 (Benchmark Index of India) has sharply outperformed the S&P 500 on a 5-year and 20-year compound annual growth rate (CAGR) basis. Subsequently, select Indian AIFs have managed to generate an average CAGR return of 34%/21%/26% on a 2-year/3-year/5-year basis, demonstrating an exemplary performance over benchmark index.
Like mutual funds, AIFs usually pool investors’ money and invest; however, the ability of AIFs to respond swiftly to changing market conditions – an essential trait required in the often volatile environments of emerging economies – gives them a solid edge to navigate these markets.
Key drivers of AIF investment growth
Regulatory reforms: Many emerging markets are implementing investor-friendly regulations to foster the growth of AIFs. These reforms aim to improve transparency, reduce bureaucratic hurdles, and provide tax incentives to investors.
Rising wealth: The burgeoning middle class and increasing wealth in emerging economies are fuelling demand for sophisticated financial products. AIFs cater to this demand by offering bespoke investment solutions.
Globalisation of capital: Institutional investors from developed markets are increasingly seeking diversification by allocating capital to AIFs focused on emerging markets. This trend is driven by the higher growth rates and attractive valuations prevalent in these regions.
Challenges and risks
While the opportunities in emerging markets are immense, they are not without challenges. Political instability, currency fluctuations, and regulatory uncertainties can pose significant risks to investors.
To mitigate these risks, fund managers adopt robust due diligence practices, stay abreast of macroeconomic trends and also establish local partnerships to ensure on-the-ground knowledge of happenings and thus minimise risks as best they can. Diversification within the AIF portfolio can also help in minimising potential losses.
The path ahead
The outlook for AIFs in emerging markets remains promising as they are properly placed to bridge the gap between foreign investors and local prospects as global capital flows increasingly shift towards these nations. The appeal of AIFs will only increase as innovation, sustainability, and governance are prioritised.
AIF structures suited to particular industries and regions will probably proliferate in emerging economies as they continue to develop. Investors will gain from this change, which will also help the economies of these regions grow more broadly.
In conclusion, for individuals who are prepared to handle the intricacies of these economies, investing in AIFs in emerging markets offers a strong opportunity.
With 10 years in equity research, Vikas Jain specialises in high-return stock ideas, excelling in market analysis and financial modelling. A top MBA graduate from Nirma University, he is poised to leverage growth within Gujarat International Finance Tec-City (GIFT City) as a skilled fund manager, with his strong industry knowledge and portfolio management skills driving strategic investments in its evolving ecosystem. Contact Vikas.
GCG member firm RNM Capital FME IFSC LLPGIFT City, Gandhinagar, Gujarat, IndiaAdvisory
RNM Capital FME is a fund management entity focused on raising both resident and non-resident funds. By capitalising on GIFT City’s global financial hub status, RNM Capital Trust aims to provide investors with high-potential opportunities in India’s burgeoning economy.
