What costs do alternative investments involve?

Alternative investment fund managers usually charge a higher annual management fee than traditional funds to cover the cost of specialized investment teams, due diligence, complex legal structures, and monitoring of illiquid assets.

Many alternative investment funds have a performance fee (carry), for example a percentage of the profit made above a certain threshold (hurdle rate). This theoretically aligns the interests of the manager with those of the investor, but it can also create incentives for taking additional risks if the structure is not well designed.

• Trading and operational costs. Investments in illiquid assets require legal, fiscal, and technical due diligence (especially for real estate, infrastructure, loans). There are consultancy, valuation, audit, custody, and reporting costs, which are borne by the fund and, therefore, indirectly by the investor.
• Structuring and financing costs. Funds that use leverage (loans at the fund or investment vehicle level) bear interest and financing arrangement costs. These increase risk but can also amplify returns – it's important to see how much leverage the fund uses.