Products Diversify Your Portfolio with Alternative Investments

Diversify Your Portfolio with Alternative Investments

Diversify your portfolio with alternative investments. At Credit Suisse we enable you to invest in markets that are particularly difficult to access, offering you a wide selection of hedge funds, commodities, real estate, and private equity products.

Opportunities with alternative instruments

Even Greater Possibilities with Alternative Investments

Alternative investments provide the opportunity to diversify your investment capital. You can expand your portfolio with hedge funds, real estate, or private equity and therefore benefit from the special features of each asset class.

There is little correlation between alternative investments and traditional investments, which opens up interesting opportunities to optimize your portfolio. For example, by investing in commodities or real estate both in Switzerland and abroad, you are giving your portfolio a broader basis.

We offer you, as a private investor, the opportunity to invest even in markets that are difficult to access.

Private Equity and Hedge Funds

A special form of investment is private equity – i.e. investments in private companies not listed on the stock exchange. These are often emerging companies looking for capital for their next growth step. A subcategory of private equity is venture capital investments, which invest in particularly high-risk companies. The corresponding funds invest directly in private equity and open up new opportunities for investors.

Hedge funds provide further opportunities. These are investment funds, which are managed actively and, potentially, extremely flexibly. All the options offered by the market are open to the fund manager, which he implements using specific strategies and according to his investment objective.

Unlimited Opportunities with Hedge Funds

Classic investments not enough for you? Want a wider range of strategies and instruments? You could consider hedge funds, which allow for short sales or the targeted use of leverage products.

The range of hedge funds is huge and the risk profile varies accordingly. What all hedge funds have in common is that they are actively managed by a fund manager based on a specific strategy or a combination of several strategies.

Selecting the right hedge fund is therefore of crucial importance. At Credit Suisse, hedge funds are dealt with by specialists, who assess them independently according to several criteria. You can therefore be safe in the knowledge that you will only collaborate with reputable suppliers.

Basic Strategies for Hedge Funds

With the relative value strategy, the fund manager utilizes the price differences in diverse markets. For example, a short-term security, which is undervalued on the stock exchange, is purchased so that it can be sold at a higher price elsewhere. The profit results from the price difference.

Takeovers, bankruptcies, or mergers of companies have a significant impact on share prices. If a fund manager employs the event-driven strategy, he takes advantage of these fluctuations by specifically looking for takeover candidates or companies in financial difficulties.

Fund managers who use tactical trading speculate on market trends. They try to predict the future development of currencies or commodities, for example, as early as possible. This strategy benefits from increased volatility in the financial markets in particular.

With this strategy, the fund manager purchases undervalued shares on the long side and sells borrowed, overvalued securities on the short side through short sales. In doing so, it is speculated that development will be better for some companies in the future, while for others it will be worse. If the calculation works out, this results in a profit.

With the multi-strategy, the fund manager invests in several of the strategies mentioned – depending on which is more promising in the market environment. The strategies can be weighted differently over time. Or, it is possible to not invest in individual strategies.

Potential Risks

Potential Loss

The generally high-risk strategies followed by hedge funds may involve the use of derivatives, short sales, and credit-financed investments (leverage). This results in a higher risk of loss that may even entail a total loss for the investor.

Market Risk

The investor bears the risk that the value of the hedge fund could fall during the holding period. This may occur due to fluctuations in the market values of the underlying assets (e.g. equities, interest rates or derivatives). These value fluctuations can be exacerbated by the use of derivatives and short selling. In the case of credit-financed investments, credit may be terminated in certain circumstances. This can force the hedge fund to liquidate the underlying assets at an unfavorable time.

Credit Risk

Credit risk is the risk of insolvency on the part of the borrower. Hedge funds often take out loans from banks (prime brokers) many times in excess of the value of fund net assets. This results in the risk that the hedge funds will not be able to meet these obligations when they fall due, creating a risk of partial or total loss for investors.

Liquidity Risk

Hedge funds may often invest in securities that are illiquid or in participations that are sometimes impossible to liquidate or that can be sold only by accepting high losses. Moreover, there is a liquidity risk for the investors themselves, because possibilities for redemption of the fund units are restricted. It may only be possible to trade the units in the primary market on specific dates, depending on the characteristics of each particular fund. It is possible for the fund management company to limit or completely suspend redemption of fund units, or postpone redemptions until later trading days. In this case, investors might only receive the redemption proceeds after a lengthy period.

Foreign Exchange Risk

Investors may be exposed to foreign exchange risk if underlying assets are traded in a different currency than the hedge fund, or the hedge fund is set up in a currency other than their home currency.

Investor Protection

Hedge funds are largely unregulated, and the fund managers do not require authorization. In particular, hedge funds are not subject to the same investor protection provisions as traditional investment funds.

Transparency

Hedge funds are usually subject to lower reporting and accounting requirements than ordinary investment funds. For this reason, investors may find it difficult to assess the investment strategy, portfolio diversification aspects, and other factors relevant to investment decisions. 

Other Risks
  • Dependence on the fund management company: Hedge fund managers have greater freedom in their investment decisions than managers of traditional investment funds.
  • No daily valuation
  • Investments in emerging market economies, commodities, or real estate

Direct or Indirect Investments in Commodities

Depending on the commodity, there are various factors determining price, including output, supply and demand, transport, shelf life, and storage costs. Political clashes or armed conflicts and new materials handling technologies, such as fracking, also limit or expand what is on offer. The efforts being made towards renewable energy must also be considered.

You can invest directly in commodities by purchasing the physical goods. You can also make indirect investments, such as equities in mining companies, investment funds, or structured products.

However, investments in commodities are very specific and are subject to high fluctuations. They are generally less suitable for private investors, but can be used to diversify a portfolio.

Types of Commodity Investments

If you want to physically own commodities, it is worth considering the costs and effort required to do so. Not all types of commodities are suitable for long-term storage. In addition, the storage and transport of commodities entails significant costs.

Instead of investing in commodities directly, you can also indirectly purchase equities in companies. In this way, you speculate on the development of the relevant commodity and also invest in the future of the company.

More about equities

A third option is funds, which invest in commodities and companies in this sector. In this case, even small amounts can be invested. A broad diversification of different investments also reduces the risk for you.

More about funds

Want to speculate on the future development of commodities? Commodity certificates are the right option for you. Certificates are available on both rising and falling prices and, instead of just one single commodity, you can speculate on the development of commodity indices.

More about the opportunities and risks associated with structured products

Potential Risks

Potential Loss

Investments in commodities can be subject to larger price fluctuations than normal investments. Moreover, some commodity markets may experience a temporary lack of liquidity. This may result in partial or total loss for the investor.

Market Risk

The investor bears the risk that the value of the investment may fall during its term. This can happen as a result of commodities price fluctuations in the market.

Credit Risk

Counterparty risk is the risk of losses arising from the failure of a business partner to fulfill its contractually agreed payment or delivery obligations.

Foreign Exchange Risk

The investor may be exposed to a foreign exchange risk if the commodities underlying the financial instrument are traded in a currency other than the currency of the instrument or if, in the case of direct investment, the commodity is denominated in a currency other than the investor's home currency.

Other Risks
  • Investments in commodities are often made indirectly via futures or over-the-counter (OTC) derivatives. This involves additional risk for the investor.
  • A lack of transparency in some commodities markets due to an absence of standardization and poor information
  • Margin call risk: For several types of derivatives, the investor must provide collateral ("margin"). If the value of the derivative performs unfavorably for investors, an increased margin becomes due ("margin call"). If the investor is unable to provide the additional collateral, the derivative is closed out, resulting in a loss from the derivative.
  • Delivery risk when concluding a derivatives contract if physical delivery has been agreed. In certain circumstances it may be either very expensive or totally impossible to obtain the commodity to be delivered.

Returns from Appreciation of Real Estate

Real estate can provide moderate yet continuous returns due to appreciation of the property. This means you can make a good investment over a longer time horizon. A distinction is made between direct and indirect investments. The direct purchase of real estate in Switzerland or abroad would be possible, but this would involve high capital expenditure.

In comparison, if you purchase equities in real estate companies or shares in real estate funds, you can invest with fewer financial resources. You also reduce the risk concentration, which would arise if you purchased a single property.
In comparison, if you purchase equities in real estate companies or shares in real estate funds, you can invest with fewer financial resources. You also reduce the risk concentration, which would arise if you purchased a single property.

How to Invest Indirectly in Real Estate

If you purchase equities in companies in the real estate sector, you can profit from the opportunities in the real estate market. Of course, business risk also plays a role when selecting a security. 

More about equities

You can also buy shares in funds instead of equities. These funds invest either directly in real estate and/or in equities of real estate companies. They provide the advantage of a more broadly diversified investment. However, some real estate funds have low liquidity.

More about funds

You can also invest in real estate indirectly using derivative instruments such as securitized mortgages or index futures. It is particularly important to consider the opportunities and risks because these investments do not follow the traditional pattern and are not comparable with other financial derivatives.

More about products

Potential Risks

Market Risk (Interest-Rate Risk)

The investor is exposed to the risk that changes in interest rates may have a negative impact on the value of the real estate. Real estate investments react in the opposite way to interest rate changes. When interest rates fall, mortgage loans become less expensive, meaning investors can earn higher revenues. When interest rates rise, the returns decrease, leading to negative effects on the real estate value. If the property is linked to a real estate fund, then the fund is also affected.

Liquidity Risk

Private equity funds often contain illiquid investments. In certain cases, it may be impossible to liquidate individual positions, or in order to do so, only by accepting high losses. Investors are also exposed to a liquidity risk owing to the limited marketability of the fund unit acquired. Disposal of fund units may also be prohibited by the fund's terms and conditions.

Foreign Exchange Risk

When making indirect real estate investments, the investor may be exposed to a foreign exchange risk if the financial instrument's underlying asset is traded in a currency other than the currency of the instrument or the instrument is denominated in a currency other than the investor's home currency.

Other Risks
  • Cyclical risk: Real estate markets are dependent upon economic cycles and values may fluctuate widely over a cycle. Timing of entry and exit is therefore an essential consideration.
  • Rental and local market risk: Potential rental income depends on local supply and demand. A saturated real estate market can have a negative impact on rental income from real estate investments.
  • Environmental risks and their associated follow-up costs incurred through restoration.
  • Changes in legal framework conditions

Investing in Private Equity Independent of the Stock Exchange

Both in Switzerland and around the world, as well as companies listed on the stock exchange there are countless privately owned businesses. They also need capital. If you want to invest in these companies and their economic successes as a private investor, you can do this by participating in a corresponding fund.

Direct investments in private equity are not possible at Credit Suisse because, differently from traditional funds, private equity managers often have an influence as investors or owners and determine the strategy of the company. To what extent and how long you invest in a company depends on the strategy of the private equity fund and the time of the investment.

Typical situations in which private companies require external capital include start-ups with particularly high growth potential, companies requiring borrowed capital for their next growth step, and takeovers for the purpose of strategic realignment.

Private equity investments require a long time horizon and special knowledge of the fund manager. As the companies are not listed on the stock exchange, it is not possible to sell the investment immediately.

Potential Risks

Potential Loss

If the target companies held by a private equity fund in its portfolio perform badly, the result may be a partial or, in the worst-case scenario, complete write-off of investments. Investors may therefore suffer partial or, in the worst-case scenario, total loss of their fund unit. 

Liquidity Risk

Private equity funds often contain illiquid investments. In certain cases, it may be impossible to liquidate individual positions, or in order to do so, only by accepting high losses. Investors are also exposed to a liquidity risk owing to the limited marketability of the fund unit acquired. Disposal of fund units may also be prohibited by the fund's terms and conditions.

Foreign Exchange Risk

Investors may be exposed to foreign exchange risk if underlying investments are posted in a different currency than the private equity fund, or the private equity fund is set up in a currency other than their home currency.

Other Risks
  • Low investor protection and regulation
  • Dependence on the fund management company: Private equity fund managers have greater freedom in their investment decisions than managers of traditional investment funds.
  • No daily valuation: It is based on estimates or comparative figures, and can be highly subjective.

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