How Costs and Fees Compare between Various Alternative Investments

Screen-Shot-2014-12-16-at-09.47.32 How Costs and Fees Compare between Various Alternative Investments

Being a relatively new field of interest, alternative investment have been slowly gaining popularity, largely with an audience that likes investing for the fun of it as well as the potential of high returns. These are usually the people who can stomach the high risk involved in these investments. In other words, alternative investments are for those investors who have been in the game for quite some time and have picked up tricks along the way. These sophisticated investors understand what they are getting into by investing in this unique field of options. This is mostly because investing in alternative funds requires a substantial investment as there are a number of costs and fees involved.

Depending on the type of investment, fees can be high or low as there are several other costs involved other than the amount of money you invest initially. Commission costs as well as the cost of hiring an expert for advice also add to the expense. Additionally, in case of an alternative investment there are other costs you incur after the purchase in order to maintain the investment in its original state. For example, a property has to be maintained otherwise it will start looking shabby and after a couple of years, start degenerating which would require renovation costs as well. In order to avoid these renovation costs, regular maintenance of the property has to be carried out to ensure it stays in good condition.

Then there are storage costs if the alternative option you are purchasing has to be stored until it is ready to be sold off for a profit. For example, wine is an alternative asset that has to be stored at a certain temperature in order to maintain its quality. This would lead to additional semi-annual or annual costs until the time when it has to be sold. These extra charges need to be considered when an investor is purchasing an alternative option. Another set of costs, that although optional are highly advised, are insurance costs which would be incurred for the alternative option to secure your investment in case it is damaged.

When it comes to fees, one of the major costs is those of the fund manager or the investment agent who will manage your investment and guide you regarding the best time to sell it off. By the end of the investment, there are a number of fees the fund manager charges. These charges include an initial fee as well as an agreed upon annual charge. Apart from these fees, there might also be the performance fee which could add up to a good percentage of the profit.

The performance cost is also a kind of ‘insurance’ to ensure that the manager handles the investment wholeheartedly. This is the motivating factor or the incentive for the fund manager to make the investment for the manager worthwhile as well as make the best decisions that will make the most profits. Due to the fact that the fund manager’s proper handling of all the steps of the investment would make him more money is the reason he will do his job well.

However, in some cases, the fund manager is also making money from a second source which is directly related to the outcome of the investment. This is why it is essential to ensure that the manager’s interests and the investor’s interests are on the same page. It is also of critical importance that the fee structure is as transparent as possible to ensure no arguments arise after the profits are made. This can be done by deducting the fees percentage of the manager as well as all other costs in the first place when calculating profits so it becomes clear what the actual returns will be.

One of the main reasons alternative investments should only be opted for by the more sophisticated investors is because they would be able to see through the fund manager’s actions to ensure he is not trying to outsmart them or being outsmarted himself by other traders. When the investor is experienced, the manager will not try to pull any tricks and the entire investment process would go smoother.