ראשי \ Guide to Alternatives

Guide to Alternatives

Objective Knowledge Center

Alternative investments are complex and require professional knowledge and experience in understanding all the opportunities in the market. As its name implies, the field of alternative investments consists of investments that provide an alternative to traditional investments, such as bonds, shares, exchange-traded notes, etc. Many alternative funds are raising capital and the options are diverse. Objective’s alternative investment guide contains a glossary and an explanation of the types of funds.

Types of funds

The alternative market has developed greatly in recent years, and the number of alternative funds has been increasing, mainly in areas such as credit, real estate, infrastructure and more, in both local and international markets. Demand by investors has also been growing, out of a desire to diversify the investment portfolio and spread risks – In each fund, you will find a breakdown by general background, strategy, underlying assets, deal structure and advantages, risks and ways to address them.
The list is as follows:

Credit Funds

Real Estate Funds

Private Equity Funds

Venture Capital Funds

Hedge Funds

Infrastructure Funds

Secondary Funds

Choose Fund

Credit Funds

Real Estate Funds

Private Equity Funds

Venture Capital Funds

Hedge Funds

Infrastructure Funds

Secondary Funds

Definition & Structure:

Private credit funds are institutional investment vehicles that provide direct lending to private companies or entrepreneurs, bypassing traditional banks and public markets. Typically operating over a medium-term horizon, these funds deploy capital in structures such as senior secured debt, mezzanine/subordinated debt, or special-situation financing. They emphasize robust protective mechanisms—secured collateral, payment priorities, and rigorous underwriting standards.

Objective:

These funds aim to generate steady returns for investors through regular interest payments and by maintaining significant oversight at every stage of the credit lifecycle—from origination through repayment. Their target borrowers are often businesses that lack sufficient bank financing or prefer the flexibility offered by private capital.

History & Evolution:

The private-credit asset class gained traction following the 2008 subprime crisis, when stricter banking regulations (such as Basel III) led to a contraction in commercial lending—especially for mid-market firms and higher-risk sectors—creating a financing gap filled by private credit providers.

In recent years, the asset class has become a major growth driver within private markets. Institutional investors—pension funds, insurers, endowments—have significantly allocated to private credit, attracted by its yield potential in a prolonged low-rate environment and its income-generating profile outside of equities.

In Israel, the sector has seen accelerating growth, with new funds emerging and traditional banking-originated credit shifting into private products. One notable example: Sapir Fund (led by Ruby Capital), which provides sizable credit facilities for residential real estate developments, combining senior debt and preferred equity tailored to project profiles.

Private credit funds employ a spectrum of strategies varying by risk level, debt structure, loan purpose, and borrower type. The core strategies include:

Senior Secured Debt:
The most conservative and common strategy. First-lien loans are secured by collateral—real estate, tangible assets, equity stakes, or future cash flows. The fund benefits from repayment priority in default scenarios. Interest rates are set based on borrower quality, loan-to-value (LTV) ratios, and maturity, with fixed or floating rates typically benchmarked to Prime or SOFR.
Mezzanine/Subordinated Debt:
Junior debt without senior collateral cover. In exchange for greater risk, funds receive higher interest and sometimes equity participation via warrants or equity kickers. This strategy is usually deployed for mid-market companies with solid fundamentals but requiring layered financing.
Special Situations / Distressed Credit:
Financing firms in temporary distress, under restructuring, or negotiating debt workouts. These high-risk, high-return scenarios may involve bridging financing, or the acquisition of distressed debt at a discount. Successful execution depends on deep underwriting, legal expertise, and direct asset access.
Real Estate Credit:
Financing real estate projects with legal collateral such as lien on land or buildings. Typical loans include construction, acquisition, or bridge financing pending leasing/sale. This strategy requires proprietary real estate know-how, appraisal support, and thorough project cash-flow analysis.

Effective private credit investing relies on identifying high-quality collateral assets that anchor the fund’s capital and offer robust protections in default scenarios.

Collateral Asset Categories:

Real Estate: Residential, office, retail, logistics, and hospitality backed by market data such as occupancy rates and lease cash flows.
Operational Assets: Equipment, machinery, fleets—commonly used in asset-backed lending structures.
Future Cash Flows: Recurring revenue streams from contracts, royalties, or subscription models.
Financial Assets: Public or private market securities, or third-party receivables pledged as collateral.

Loan Purposes:
Loans can serve diverse financing needs—acquisition funding, working capital, equipment procurement, construction finance, or operational expansions—all secured against the borrower’s assets.

Characteristics of Quality Collateral:

Cash-flow generating: Collateral must ideally produce revenue to support servicing.
Stable & transparent valuation: Assets should be appraisable via active markets or valuation standards.
Relative liquidity: Eligible collateral tends to include assets easily monetized if liquidation is needed.
Legal enforceability: Full lien perfection, proper registration, and enforceable covenants are essential.

Valuation Risk Drivers:

Macroeconomic forces (interest rates, inflation, regulation)
Sector-specific volatility (e.g., real estate cycles, industrial demand, healthcare trends)
Borrower’s operational efficiency
Competitive supply of alternative financing

Successful credit funds base their resilience on diversified collateral pools, disciplined underwriting, and ongoing monitoring of collateral value.

Private credit transactions are structured with legal and financial precision to deliver controlled, risk-aware financing that balances borrower needs and investor protections.

Common Loan Types:

Bullet Loans: Interest paid periodically; principal repaid in full at maturity—optimal for borrowers with predictable exit or refinancing events.
Amortizing Loans: Scheduled principal repayment—limits exposure to one-time default events.
Tranche Financing: Capital disbursed in stages tied to project milestones, ensuring accountability and phased risk deployment.
Structured Facilities: Multi-layered debt packages—including senior, mezzanine, and PIK tranches—tailored to cash-flow complexity.

Typical Collateral & Security Structures:

First-lien liens on real estate or equipment
Pledge arrangements over future cash flows
Personal or corporate guarantees
Equity pledges for potential governance influence or enforcement

Governance & Control Covenants:

Financial thresholds (DSCR, minimum liquidity, leverage ratios)
Custom loan documentation with default triggers and enforcement rights
Ongoing stewardship via loan officers or credit committees, especially for sensitive deals

Structural Benefits:

Strong legal safeguards for lenders
Proactive risk management and real-time decision frameworks
Transaction design aligned with borrower profile and sector nuances
Portfolio-level enhancement of risk-adjusted returns through structured interest/payment mechanics

Advantages:

Stable Income: Predictable quarterly or monthly interest streams anchored by contractual terms.
Active Risk Control: The fund tailors each loan (“tailored financing”), retaining oversight on terms, collateral, covenants, and underwriting rigor.
Secured Exposure: Loans are backed by strong collateral claims and guarantees, enhancing recoverability.
Diversified Exposure: Spreading loans across borrower types, industries, and geographies helps mitigate concentration risk.
Enhanced Yield: Returns typically exceed those available in public fixed-income markets, reflecting illiquidity premium and structural rigor.

Primary Risks & Mitigation:

Credit Risk: Borrower default — mitigated through stringent underwriting, stress-tested cash-flow analysis, and adherence to leverage and coverage covenants.
Collateral Value Decline: Market downturns eroding collateral — managed by regular appraisals, conservative LTVs, and collateral top-ups.
Interest Rate & Market Risk: Rising rates affecting borrower capacity — addressed via floating-rate mechanics and hedging strategies.
Liquidity Risk: Difficulty in exiting loans — controlled through portfolio-level maturity planning and potential external facilities.
Regulatory/Legal Risk: Policy shifts or contractual disputes — navigated via detailed documentation, third-party counsel, and legal oversight.

Summary:

Private credit funds offer a compelling alternative investment channel—uncharted by public markets yet delivering structured income and tailored downside control. Through legal rigor, active underwriting, and collateral specificity, these funds strike a balance between return generation and capital protection. However, success demands deep domain expertise, continuous oversight, and multi-layered risk governance—because each loan, in structure and execution, represents a unique exposure demanding attentive management across financial, operational, and legal dimensions.

Overview:

Real estate funds are investment vehicles that operate within the private real estate domain, targeting various property assets for purposes such as value enhancement, development, financing, or long-term holding for rental income. These funds may focus on income-generating assets, development projects, raw land, or provide financing structures. They play a strategic role in institutional and accredited investors' portfolios by offering exposure to illiquid, tangible assets with potential for steady income or capital appreciation.

History & Industry Evolution:

Over recent decades, dedicated real estate investments have gained significant traction globally, including in Israel, as part of a broader shift toward seeking stable, real returns decoupled from public equity markets. Private real estate funds bring professional management, access to complex transactions, and the scale benefits of asset acquisition, operation, and enhancement.

Real estate funds employ diverse strategies that differ by risk level, asset type, geographic focus, investment horizon, and operational involvement. Typically, these strategies range from purely income-oriented assets to value-add development plays:

Core / Core Plus – Stable, Income-Producing Assets
- Core: High-quality, low-risk properties (e.g., office, logistics, multi-family) with long-term tenants in prime locations.
- Core Plus: Similar assets with moderate upside potential—such as improving occupancy or renegotiating leases.
Value-Add – Enhancing Underperforming Assets
- Targets assets with operational inefficiencies or physical deficiencies.
- Typical Actions: Renovations, lease restructuring, rebranding, and rental rate optimization.
- Goal: Capital appreciation upon exit.
Opportunistic – High-Risk Development-Driven Strategy
- Includes ground-up projects, pre-development land purchases, or redevelopment of distressed properties.
- Risk Level: High due to execution and market uncertainties.
- Horizon: Generally 5–8 years, seeking outsized returns.
Special Situations / Distressed – Distressed Asset Plays
- Acquiring properties at deep discounts due to financing distress, debt default, or legal encumbrances.
- Approach: Leverage legal expertise, restructure debt, or implement redevelopment plans to unlock value.

Additionally, there are Real Estate Credit Funds, focusing on senior or mezzanine financing, or hybrid structures. Strategy selection is driven by market context, management expertise, investment horizon, and investor preferences on liquidity, risk, and return profile.

Relevant Asset Categories:

Residential: Multi-family rental units, community housing complexes, and build-to-sell developments—characterized by high demand and stable rent cash flows.
Commercial: Office buildings, shopping malls, and mixed-use retail spaces—requiring active management but offering higher gross yields.
Logistics & Industrial: Warehouses, distribution centers, and cold storage facilities—benefiting from the e-commerce boom, with long-term leases.
Hospitality: Hotels and resorts—higher return potential accompanied by higher cyclicality.
Land for Development: Parcels at various permitting stages—offering substantial upside potential but carrying regulatory and execution risks.

Quality Asset Characteristics:

Prime location & attractive surroundings: Close to transportation, retail hubs, or educational institutions—ensures stable occupancy and value appreciation.
Cash flow / enhancement opportunity: For income assets—long-term leases with creditworthy tenants; for development assets—value uplift upon completion and sale/rental.
Permitting status: Projects with approved plans or progressing through clear permitting stages reduce regulatory risk.
Operational integrity: Professional asset management and maintenance help reduce vacancy and preserve value.

Value Drivers:

Interest rate environment: Higher rates increase cap rates and lower valuations.
Market dynamics: Demographic or sector shifts (e.g., remote work, logistics demand) impact asset performance.
Planning regulation: Zoning, property taxes, and infrastructure policy strongly influence feasibility and returns.
Local competition: Oversupply can depress returns; constrained markets typically support stronger pricing power.

Common Transaction Formats:

Income-generating asset acquisition: Fund acquires a stabilized asset, secures financing, and actively manages tenancy and lease terms.
Development projects: End-to-end involvement—from land purchase through planning, construction, marketing, and rental/sale.
Private financing arrangements: Provision of preferred equity or mezzanine debt, granting fixed returns with participation upside.
Sale & Leaseback: Fund purchases operating assets and leases them back to vendors—generating steady income with a known tenant.
Joint Ventures: Partnership with local developers—combining local know-how with institutional capital and structured risk sharing.

Security and Control Mechanisms:

First-lien mortgages: Ensuring priority rights in case of default.
Equity pledges of SPVs: Enables oversight and operational control, particularly in distressed scenarios.
Performance guarantees by sponsors: Financial and personal guarantees to safeguard execution and schedules.
Existing lease commitments: Long-term leases with reputable tenants enhance income reliability.

Structural Benefits:

Flexibility: Tailored structures ranging from full ownership to financing JV models, aligned to risk-return preferences.
Diversification: Ability to combine stable and opportunistic investments, optimizing overall portfolio risk-adjusted returns.
Governance & Monitoring: Built-in controls, phased capital calls, and enforcement mechanisms provide oversight throughout the investment cycle.

Key Advantages:

Reliable income streams through monthly or quarterly rent distributions.
Inflation protection via rent escalations and indexed lease agreements.
Lower volatility compared to public equities—especially for well-leased assets.
Appreciation potential through targeted enhancement strategies.
Tangible collateral offers security and peace of mind for investors.

Principal Risks & Mitigation:

Occupancy / tenant default risk: Mitigated by selecting high-demand locations, tenant diversification, lease due diligence, and capable property management.
Regulatory / planning risk: Reduced via experienced developers, legal review, and regulatory compliance processes.
Market valuation risk: Managed through macro monitoring, prudent leverage, and investment in core demand markets.
Execution risk: Controlled through contractor vetting, fixed-price contracts, and technical oversight.
Liquidity risk: Addressed by aligning fund term with investment strategy, maintaining exit options, and keeping a portion of assets more liquid.

Summary

Real estate funds offer an attractive mid-to-long-term investment solution by combining passive income, potential capital appreciation, and tangible assets. Through disciplined underwriting, project execution, and risk management, these funds deliver diverse strategies—from stabilized income properties to high-return development plays. Success hinges on robust expertise in planning, cash flow analysis, and operational oversight to navigate planning, development, and market dynamics.

Overview

Private Equity (PE) funds are closed-end alternative investment vehicles focused on acquiring ownership stakes in private companies—either to drive operational improvements, business expansion, capital structure optimization, or prepare for an eventual exit. The fund typically acquires a controlling or significant minority stake and oversees the investment proactively by influencing management, capital structure, and business strategy.

Their primary objective is to generate meaningful capital gains for Limited Partners (LPs) by creating real value—beyond mere market-driven returns. PE funds actively grow, optimize, and reposition companies toward a profitable exit, via sale to another fund, strategic buyer, or through a public offering.

PE funds operate on a predefined lifecycle (usually 8–10 years), starting with a deployment phase followed by active management and exit. While LPs forgo liquidity, they gain access to asymmetric return profiles fueled by company-level value creation.

History & Evolution

Emerging in the US in the 1980s, PE gained prominence with the rise of Leveraged Buyouts (LBOs), where investor groups acquired mature firms using high leverage to boost value and returns. Throughout the 1990s, PE matured into a key player in global M&A.

The 2000s saw further expansion of PE across Europe, Asia, and Israel, driven by strengthened credit markets, growing management expertise, and an acknowledgment by institutional investors of PE’s role in diversified portfolios.

Although the 2008 crisis introduced challenges, it also unlocked buying opportunities. Since 2010, PE’s growth has accelerated thanks to low-interest rates, abundant liquidity, and a shift toward non-public value creation.

Today, PE is an established global asset class with robust regulatory frameworks, spanning industries such as traditional manufacturing, technology, healthcare, and energy—and is central to institutional investment strategy.

PE funds differ in terms of involvement, company lifecycle stage, risk-return profile, and control level. Key strategies include:

Buyout / Leveraged Buyout (LBO)
The core strategy: acquiring full or majority stakes in mature, profitable firms using external leverage. PE firms aim to optimize operations, restructure capital, drive strategic M&A, and install advanced governance. Typical holding periods are 3–7 years, ending in sale to another fund, strategic buyer, or IPO.
Growth Capital
Minority equity stakes in growing companies—without full control—to support geographic expansion, product development, or M&A. PE firms often negotiate certain rights (e.g., board representation), co-invest alongside other investors, and support management teams while preserving autonomy.
Venture Capital (VC)
Early-stage and high-risk financing focused on startups in technology, life sciences, and other innovative sectors. Despite high risk, VC investments offer high upside potential, particularly through multiple-stage investments (Seed to Series A+).
Late-Stage Venture
Investments in established companies with product-market fit and initial revenue—positioned for scale or liquidity. These deals balance growth potential with more mature exit routes (e.g., IPO or trade sale).
Turnaround / Special Situations
Acquiring distressed assets undergoing financial, operational, or legal turbulence—often in restructuring or bankruptcy. These strategies seek extraordinary returns but demand deep operational and legal expertise.
Secondary Investments
Acquiring existing LP stakes in other PE funds or fund portfolios. This strategy enables entry into mature, near-monetization opportunities—often at a discount—with shorter holding horizons and lower risk.

PE funds invest in diverse private companies depending on strategy and sector expertise:

Traditional Industry & Manufacturing
Plants, engineering firms, and industrial solution providers—offering opportunities for operational efficiencies and margin improvement.
Technology & Digital Services
Software, SaaS, fintech, and cybersecurity—characterized by fast growth and global scalability.
Healthcare & Life Sciences
Clinics, medical devices, and healthcare services—offering defensive characteristics and regulatory barriers.
Consumer Goods & Retail
Food, retail chains, and personal services—dynamic sectors with brand loyalty and evolving consumer trends.
Financial Services & Logistics
Credit platforms, insurance intermediaries, payment systems, and warehousing—fields driven by innovation and operational utility.
Energy & Infrastructure
Clean energy, water utilities, and transport—requiring regulatory insight and long-term growth strategies.

Key Investment Criteria:

Positive or projected cash flow potential
Strong or improvable management teams
Competitive advantages (technology, brand, market position)
Growth potential (organic or via mergers)
Stable or expanding market sector
Scalable business model

Valuation Drivers:

Current profitability (EBITDA, growth, margins)
Future forecasts and secured contracts
Comparable company multiples
Market due diligence and industry trends
Management and governance quality
Existing leverage and repayment capacity
Value creation upside

Frequently, PE targets companies with untapped potential due to conservative management, resource constraints, or lack of strategic direction—making them ideal candidates for PE-driven transformation.

PE funds structure deals in various ways based on control needs, risk appetite, and value creation goals:

Majority/Full Buyout: >50% equity—often 100%—typically leveraged, with full governance control and anti-dilution terms. Highest return potential but requires strong management expertise.
Minority Investment with Control Rights: Minority stakes combined with veto rights, board seats, governance controls, drag-along/tag-along provisions, and management oversight.
Capital Stack Structuring: Customized combinations of Common Equity, Preferred Equity, Mezzanine Debt, or hybrid instruments—aligned to risk-return expectations.
Co-Investments / Syndication: Including other investors to spread risk, enhance due diligence, and allow greater deal size without concentration.
SPV Structures: Asset-specific SPVs isolate risk and facilitate clear governance and contractual arrangements.

Leverage Aspects:

LBOs: Employ debt financing secured against company cash flows and assets to amplify returns—balanced by increased risk.
Covenants: Structured loan terms include dividend restrictions, leverage caps, reporting obligations, and financial thresholds.

Governance Interaction:

Installing board representation
Approving major corporate actions (e.g., budgets, executive changes, capital raises)
Management incentives (MIP) aligned with performance
Exit mechanisms like drag-along or call options
Enhanced voting rights and carried interest structures

Exit Mechanisms:

Most exits occur within 3–7 years and include:

Secondary Buyouts (sale to another PE fund)
Strategic Sales (to corporate acquirers)
IPOs (public offerings)
Sponsor or Local Buybacks

Advantages:

High Return Potential: Operational improvement, growth financing, M&A integration, and capital restructuring all drive value creation.
Operational Influence: Full/partial control provides a strategic edge compared to passive public investments.
Diversification: Multi-industry, multi-geography portfolios reduce risk and enhance stability.
Value Acceleration: Active transformation via management enhancement, automation, cost reduction, and market expansion.
Strategic Expertise: PE teams bring corporate-level experience, M&A skill, financial structuring, and risk discipline.

Key Risks & Mitigation:

Operational Risk: Addressed through board engagement, strategic hires, continuous oversight, and business planning.
Macro/Systemic Risk: Mitigated via diversified investment themes, scenario planning, strategic flexibility, and dynamic valuation modeling.
Exit/Illiquidity Risk: Managed using phased exit strategies, secondary market analysis, and strategic partnerships for monetization.
Leverage Risk: Controlled by appropriate capital structure design, covenant guardrails, and monitoring of debt-to-equity ratios.
Regulatory/Legal Risk: Minimized through legal due diligence, contractual safeguards, and global regulatory compliance.

Summary

PE funds offer a dynamic, active investment framework enabling value creation through hands-on governance and strategic growth. While exposures include operational complexity, macroeconomic dependencies, and high leverage, PE firms deploy structured mitigation tactics—such as strong oversight, specialized teams, and tactical exits—to capitalize on potentially superior returns. For institutional and high-net-worth investors seeking growth and transformation exposure, private equity remains a core pillar of a diversified alternative portfolio.

Overview

Venture Capital (VC) funds are private investment vehicles specializing in financing early-stage, innovative companies—often in sectors such as software, AI, biotechnology, cybersecurity, clean energy, and more. They provide seed or follow-on funding (Seed, Series A–C), typically in exchange for minority equity with significant rights, aiming to guide the company toward an exit—either via merger, acquisition, or IPO.

VC funds accept higher risk compared to other private equity types to gain exposure to potentially disruptive innovators. Their involvement goes beyond capital, including strategic guidance, executive recruitment, introductions to partners, and support in key decisions. VC funds are vital engines of technological and industrial innovation, supporting start-up ecosystems both locally and globally.

History & Evolution

Venture capital emerged in the U.S. during the 1950s–60s to support tech-driven ventures. It expanded through the 1980s–90s alongside the rise of the internet, funding now-iconic firms such as Google, Amazon, and Apple. In Israel, the sector gained traction in the early 1990s, bolstered by government support under the ‘Yozma’ program, later making the country one of the world leaders in VC investments per capita. Today, the ecosystem includes independent local funds, branches of global VC, corporate VC arms, academic incubators, and public-private partnerships. VC continues to evolve with trends in AI, climate-tech, Web3, and ESG metrics, and remains a high-risk but strategic investment frontier in an uncertain world.

VC funds focus on early-stage innovation, taking on elevated risk for the chance of outsized returns. Strategies vary by investment stage, sector focus, and managerial approach:

Seed / Pre-Seed / Early Stage
Target companies at idea or prototype stages. This strategy involves high risk but valuable entry valuations and potential for exponential returns. VC is deeply involved in building the startup—often shaping decisions, hiring, and IP protection.
Early Growth (Series A–B)
Targets startups with MVPs, initial market traction, or early revenues. Funding supports scaling teams, marketing, or product development. The VC assesses product-market fit, team quality, and scalability potential.
Late Stage (Series C–D+)
For more mature, revenue-generating startups preparing for IPO or strategic sale. Risk is lower than early stages, with focus on operational metrics and clear exit timing.
Sector/Technology Focus
Some funds specialize in niches like AI, cybersecurity, digital health, climate-tech, Web3, robotics, or fintech. Others are corporate VC arms aligned with corporate strategy, offering strategic synergies and access.

In VC funds, underlying assets are private, often illiquid equity holdings in startups at different maturity stages. Investments are structured as preferred stock, with value realized only upon exit. Key asset characteristics include:

High Growth Potential: Startups in dynamic markets with unproven business models but rapid scale potential.
Illiquidity: Equity is illiquid until an exit event (M&A, IPO).
Lack of Current Cash Flow: Long hold periods with no immediate returns.
Asymmetric Risk-Return: Most startups may fail, but high-performing "unicorns" can significantly outweigh losses (“power law” distribution).

Investment Structure:

Preferred shares with liquidation preference, anti-dilution rights, board representation, etc.
Strategic influence through board or contractual rights.
Diversified portfolios—typically 15–30 startups—aim to hedge early-stage risk.

Valuation Drivers:

Progression through funding rounds increases valuation.
Market sentiment and liquidity influence exit multiples.
Strategic partnerships with anchor investors can elevate startup value.

VC deals generally consist of primary share issuances, funding the company in exchange for equity at an agreed pre-money valuation. Secondary deals occasionally occur, where VC firms purchase shares from existing investors.

Key Deal Features:

Preferred Equity with Rights: Liquidation preferences (1x–2x), conversion options, and voting rights.
Governance Protections: Board seats, veto over key decisions, drag-/tag-along rights.
Instruments: Early rounds may use SAFEs or convertible notes that convert at a later round.
Contractual Safeguards: Include anti-dilution, pay-to-play clauses, and exit provisions.
Milestone-based Closings: Funds are disbursed in tranches tied to key performance or development milestones.

Advantages:

Outlier Returns: Early-stage tech startups can yield exponential returns.
Exposure to Innovation: Access to cutting-edge trends and technologies.
Active Involvement: VC firms support strategic decision-making, hiring, and scaling.
Ecosystem Impacts: VC investment strengthens economic growth and job creation.
Portfolio Diversification: Broad portfolio offsets risks of individual startups.

Primary Risks & Mitigation:

Tech/Market Risk: Mitigated via rigorous due diligence, selective screening, KPIs, and mentor networks.
Illiquidity: Managed by long-hold fund structures, early exit encouragement, and secondary participation or IPOs.
Deal Competition: Countered with strong reputations, early-stage focus, and strategic partnerships.
Regulatory Risk: Tackled through legal counsel, regulatory alignment, and compliance frameworks.
Founder Risk: Evaluated through team vetting, vesting mechanisms, governance rights, and co-investor support.

Summary

VC funds play a pivotal role in early-stage innovation, offering the potential for extraordinary returns while requiring long-term commitment, high risk tolerance, and strategic engagement. For investors seeking exposure to tomorrow’s disruptive companies, VC represents a vital, if volatile, component of a diversified portfolio.

Hedge funds are alternative investment vehicles seeking absolute returns through a variety of flexible strategies—often employing significant leverage, short-selling, derivatives, and dynamic positioning across both public and private markets. Unlike traditional funds, they are not benchmarked to a market index; instead, they aim for consistent positive returns while exercising strict risk management.

Although the term “hedge” originally referred to risk-reduction techniques, many hedge funds today focus on exploiting market inefficiencies, macroeconomic shifts, or informational asymmetries rather than simply hedging. They vary dramatically in terms of risk profile, asset types, liquidity, and leverage.

Structurally agile, hedge funds can swiftly rotate between markets, capitalize on short-term opportunities, and deploy sophisticated financial instruments. While this flexibility can generate excess returns in turbulent environments, it also introduces heightened risk—especially for highly leveraged or concentrated strategies.

History & Evolution

The first “hedge fund” emerged in the 1940s, when Alfred W. Jones combined long and short equity positions to reduce volatility. By the 1980s and '90s, hedge funds had become sought-after by financial institutions, private banks, and high-net-worth individuals (HNWIs) for their potential to deliver returns independent from overall market trends.

In recent decades, the hedge fund industry has expanded significantly in size and complexity. In parallel, regulatory scrutiny intensified—particularly after the 2008 financial crisis—imposing greater demands for transparency and risk oversight, especially in the U.S., Europe, and Asia.

In Israel, hedge funds have been gradually gaining traction since the 2000s. Originally private and limited in structure, the sector now includes onshore, regulated mutual-structure hedge funds (hedge funds in trust), which offer increased accessibility to both institutional and retail investors. These funds benefit from daily liquidity, transparent governance, and regulatory oversight, and their presence is expected to continue growing.

Hedge funds use a wide range of strategies designed to be flexible, exploit market inefficiencies, and deploy advanced tools such as short-selling, leverage, derivatives, and exposure across global and illiquid assets. They may specialize in one approach or combine several, depending on market opportunities:

Equity Long/Short
Involves taking long positions in undervalued stocks and short positions in overvalued ones, aiming for relative returns while hedging market exposure—ideal in volatile or inefficient equity markets.
Global Macro
Builds positions across currencies, commodities, bonds, and indices based on broad macroeconomic forecasts—such as shifts in interest rates, inflation trends, FX movements, and geopolitical events. These strategies are dynamic and typically use derivatives and leverage.
Event-Driven
Seeks to profit from corporate events such as M&A (merger arbitrage), restructurings, spin-offs, or regulatory changes. Requires deep understanding of legal, operational, and financial aspects to exploit temporary price distortions.
Quantitative / Algorithmic
Relies on mathematical models, statistical data, and automated trading algorithms. Some funds use high-frequency trading, while others leverage big data and machine learning to predict trends based on historical patterns.
Multi-Strategy
Operates multiple strategies simultaneously—such as macro, long/short, credit, or event-driven—often with separate desks under centralized risk management. Flexibility across different approaches enhances risk-adjusted returns.

Other Notable Strategies:

Statistical Arbitrage
Market Neutral
Structured Credit
Relative Value
Volatility Trading
Distressed Debt
High-Frequency Trading (HFT)

Hedge funds typically invest in highly liquid assets—though some include illiquid instruments—depending on their strategy. Unlike funds focusing on physical assets, hedge funds take financial exposures, both long and short, to exploit pricing inefficiencies or market trends.

Commonly Deployed Assets:

Equities and equity derivatives
Government and corporate bonds
FX (foreign exchange)
Commodities
Derivatives (options, futures, swaps)
Structured financial products
Secondary exposures or event-driven instruments

In quantitative or multi-strategy funds, portfolios are actively allocated across assets, with some positions held short-term and others over longer horizons.

Asset Characteristics:

High liquidity: traded in public markets, often daily or weekly
Transparent pricing: mark-to-market valuation for real-time performance tracking
Hedging flexibility: each asset may serve as both risk and hedge
Built-in leverage: via broker credit, derivatives, and structured financing

Valuation Drivers:

Market conditions: rate environments, volatility, policy decisions, or geopolitical events
Relative pricing anomalies: opportunities in pairs or similar assets
Partial illiquidity: some instruments (e.g., structured credit, OTC) rely on internal valuation models

Hedge funds construct and manage diverse portfolios of trades rather than take one-off, static investment positions. Each trade is a market thesis—long or short—using instruments specific to the strategy:

Long/Short Trades: Buying undervalued assets and shorting overvalued ones to generate alpha
Macro Trades: Placing positions in global markets based on macroeconomic analysis
Event-Driven Trades: Entering positions tied to corporate events with defined risk/reward profiles
Derivatives or Options: Utilizing futures, swaps, options, and structured products for non-linear exposures or hedges

Position Characteristics:

Variable leverage depends on strategy and regulatory limits (e.g., macro funds might highly leverage, whereas market-neutral funds use lower leverage)
Liquidity spectrum: from daily liquid markets to less liquid OTC positions
Intricate risk controls: stop-loss orders, stress testing, risk limits

Legal & Financial Framework:

ISDA Agreements: For derivative contract standardization
Margin Agreements: Define collateral requirements with brokers
Side Letters: Customize terms for specific investors

Lifecycle Management:

Scaling In: Building initial positions gradually to avoid market impact
Monitoring & Benchmarking: Continuous tracking against market indices and internal risk metrics (VaR, Beta, Drawdown)
De-risking / Scaling Out: Exiting based on target performance, changing thesis, or risk limit breaches

Advantages:

Strategic Flexibility: Ability to operate across a wide range of asset classes and strategies in response to market shifts
Potential for Absolute Returns: Can generate positive returns even in down markets through tools like short-selling and leverage
Sophisticated Risk Management: Use of derivatives, hedging and quantitative oversight helps manage volatility
Diversified Exposure: Multi-strategy funds offer internal diversification, shielding against single-market dependency
Rapid Tactical Response: Short decision cycles and liquidity enable quick capture of opportunities

Key Risks & Mitigation:

Model Risk: Quant or algorithmic strategies can fail during rare or stress events; mitigation includes validated models, sensitivity testing, diversification of models, and internal risk oversight
Market Risk & Volatility Spikes: Unexpected market moves may outpace hedging; ongoing monitoring, liquid derivative usage, VAR controls, and stop-loss policies help mitigate exposure
Operational & Leverage Risk: High leverage increases potential losses; risk limits, independent risk teams, and position caps provide safeguards
Key Person Risk: Dependence on individual managers creates concentration risk; addressed via incentive structures, team-based decision-making, and governance oversight
Liquidity Risk: Illiquid positions may be hard to unwind; mitigated through withdrawal gates, matching asset-liability structures, and liquidity buffers

Summary

Hedge funds offer a dynamic, sophisticated investment approach aimed at delivering returns independent of broader markets. Their flexibility, advanced risk control measures, and strategic diversity make them attractive to sophisticated investors seeking enhanced portfolio returns and diversification. However, their complexity, high leverage potential, and structural risks demand robust oversight, deep technical understanding, and ongoing diligence regarding performance, fee structures, and ethical standards.

Overview:

Infrastructure funds are alternative investment vehicles focused on acquiring, developing, financing, or operating long-lived physical infrastructure assets—such as transportation, energy, water, communications, and public utilities. These assets are characterized by stability, predictable cash flows, long lifespans, and regulatory oversight. Infrastructure funds invest in both existing assets (Brownfield) and greenfield projects, either directly or in partnership with governmental or private entities. Their economic model often relies on long-term service contracts, delivering stable, low-equity-correlated returns with selective exposure to operational and political risks. Funds may employ financing structures like BOT, PPP, or concessions depending on jurisdiction and sector.

Evolution:

Since the 1990s, rising global privatization has turned infrastructure into an institutional investment category. Governments worldwide—including Israel—have delegated construction, operation, and financing of core infrastructure to private capital to reduce public expenditure, accelerate project delivery, and incentivize innovation. In recent years, the growth of institutional allocations—especially in a low-interest-rate environment—has driven pension funds and sovereign wealth funds toward stable long-term infrastructure assets. Innovative subsectors such as renewable energy, smart mobility, energy storage, and digital infrastructure (data centers, fiber networks) have emerged, supported by targeted public policy. Today, infrastructure is a cornerstone of institutional portfolios worldwide, driven by sustained global demand for resilient, sustainable infrastructure.

Infrastructure funds span a risk-return spectrum depending on asset development stage and operational involvement:

Core Infrastructure
Conservative strategy focusing on operational Brownfield assets with stable contractual revenues and predictable cash flows—often government-backed or natural monopolies (power plants, ports, toll roads, water utilities). Typically low-leverage and passive with immediate yield.
Core-Plus Infrastructure
Middle-risk assets with performance enhancement opportunities—such as increasing capacity, efficiency, or renewable transition. Active asset management helps capture upside while avoiding greenfield risk. Returns exceed Core, with modest incremental risk.
Value-Add Infrastructure
Mid-to-high risk strategies involving underperforming or underutilized assets, where value is created through operational, regulatory, or managerial improvements. Funds partner actively, invest in capital and governance, and target enhanced cash flows. Yield potential is higher but not contractually insured.
Opportunistic / Greenfield Development
High-risk strategy involving infrastructure at pre-construction stages—requiring licensing, financing, engineering, and construction. Often involves PPP/BOT structures with long-term revenue contracts. Returns are highest but execution risk is substantial.

Infrastructure assets serve essential public or industrial needs, remain regulated, and generate contractually-backed revenues. Key categories:

Transportation: Toll roads, seaports, railways, airports
Energy: Conventional or renewable generation, transmission lines, storage facilities
Water & Sewage: Treatment plants, pumping stations
Digital & Communication: Data centers, fiber networks, cell towers, comm cables
Environmental: Waste recovery, recycling, EV charging stations
Public & Social Infrastructure: Hospitals, schools, security facilities

Asset Quality Criteria:

Stable, long-term cash flow: Often backed by utility contracts or government off-takers
High entry barriers: Natural monopolies needing significant capital
Regulatory clarity: Transparent tariffs or contractual structures
Essential service linkage: Demand in utilities, transport—resilient to economic cycles

Valuation Drivers:

Cash flow profiles and usage forecasts
Discount rate reflecting asset risk, regulation, and leverage
Contract terms: length, inflation linkage, counterparty credit quality
Operational integrity and asset reliability
Capacity for network expansion or efficiency gains

Infrastructure funds employ a variety of transaction types:

Equity Acquisition: Purchasing controlling or material stakes in operating assets with operational influence
Greenfield Partnerships: Joint development with public/private sponsors—covering permitting, construction, and initial operation
BOT / PPP Contracts: Long-term infrastructure concessions (20–30 years) built and operated by the fund for government or users
Debt-like Instruments: Preferred equity or structured financing with stable income rights

Revenue Mechanisms:

Availability Payments: Fixed government payments regardless of usage
User Fees: Direct charges to users (tolls, utilities usage)
Institutional Contracts: PPAs or data center leasing agreements

Security & Risk Mitigation:

Project-level liens over future cash flows and physical assets
Government or regulatory performance guarantees
Operational KPIs monitored through enforcement clauses

Leverage & Financial Control:

Project finance structures isolate leverage to the asset
Loan-to-value ratios between 40% and 70%, depending on asset profile
Rigorous cash flow modeling and stress testing during due diligence

Advantages:

Stable long-term cash flows from multi-decade contractual revenue
Defensive sector exposure, with demand for utilities and transport insensitive to business cycles
Inflation hedging via index-linked tariffs
Positive ESG impact in areas like renewables and public services
Moderate leverage in long-term project structures, usually with government support

Key Risks & Mitigation:

Regulatory & political risk: Managed with selective country exposure, legal reviews, political risk insurance, and contract protections
Construction/execution risk: Mitigated by engaging experienced EPC contractors, fixed-price contracts, and milestone supervision
Operational risk: Reduced through specialist operators, KPI-driven contracts, and off-taker backup
Liquidity risk: Managed via closed-end fund structures, planned exit strategies (secondary sale or IPO), and geographic diversification
Technological/environmental risk: Addressed through proven technologies, insurance coverage, and periodic environmental monitoring

Summary:
Infrastructure funds blend long-term stability, predictable cash flows, and societal utility. Their strategic value lies in diversification, inflation resistance, and alignment with ESG mandates—while requiring deep expertise in development, operations, and regulation. Institutional-grade infrastructure managers assemble cross-functional teams and leverage strategic partnerships to deliver resilient asset performance and sustainable returns.

Secondary funds are alternative investment vehicles specializing in acquiring existing commitments in private equity, venture capital, real estate, infrastructure, or private company portfolios—typically from early investors seeking early liquidity or a change in exposure. Unlike primary funds, which commit fresh capital to new investments, secondaries purchase mature, existing stakes that typically offer greater visibility into asset quality, cash flows, and expected exit timelines.

These interests are commonly purchased at a discount to Net Asset Value (NAV), determined through thorough due diligence of portfolio assets, remaining future capital obligations, fund manager quality, and near- to mid-term realization potential. Secondary transactions may include:

LP interests in existing funds,
GP-led restructurings (Continuation Vehicles)
Direct secondaries of private company shares
Stapled deals combining primary and secondary investments under the same GP.

History & Market Development

The secondary market emerged in the 1990s, addressing institutional investors’ needs to liquidate long-dated private investments early. Over time, it evolved into a standalone market with dedicated firms, investment banks, and large fund managers.

Following the 2008 financial crisis and continuing through the 2010s, the secondary market expanded rapidly—in both deal volume and structural sophistication. Low interest rates and COVID-related liquidity dynamics further fueled activity, as investors pursued yield with reduced primary exposure risk.

Today, the secondary market is mature, with annual global deal volumes in the hundreds of billions. It offers investors immediate diversification, shortened holding periods, access to proven assets, and improved risk-return profiles. As such, it has become a cornerstone strategy for institutional investors, pension funds, asset managers, and private investors.

Secondary funds acquire existing private asset exposure in various formats, enabling indirect access to private markets with structured risk control. Key strategies include:

LP Interest Purchases
Acquiring limited partner positions in mature PE, VC, real estate, or infrastructure funds—including their unfunded commitments—at a discount to NAV. This approach leverages insight into asset performance and exit timelines for enhanced returns over shorter horizons.
GP-Led / Direct Secondaries
In GP-led deals, the fund manager transfers select assets into a new continuation vehicle. Existing investors may roll over or exit, while the secondary fund acts as anchor investor. Intensive asset-level due diligence is conducted.
Direct Secondaries of Private Company Shares
Purchasing direct stakes in private companies—often from founders, employees, angel investors, or VCs—outside the traditional fund structure. This tactic offers targeted exposure to businesses with imminent exit potential.
Stapled & Structured Secondaries
Combining a secondary stake in an existing fund with a commitment to a GP’s new fund, often at preferential pricing. These structured transactions may include leverage or preferred return terms to balance risk and reward.

The core of secondary investments comprises non-liquid fund interests or private company stakes—often at advanced life stages with defined portfolios, emerging cash flows, and imminent exit potential.

Asset types vary by fund subtype:

PE secondaries: minority stakes in private companies spanning industry, services, and technology.
Real estate: existing rental or development projects including offices, residential units, and commercial centers.
Infrastructure: operational assets such as transport corridors, energy installations, and water systems.
Venture: mature startup equity, typically in growth-stage tech or biotech firms.

Key asset characteristics:

Maturity: older vintage with established asset-level track records.
Illiquidity: limited secondary market access warrants liquidity premiums.
Cash flow: partial distributions may already be underway.
Embedded leverage: underlying fund positions may include senior or mezzanine debt.

Valuation drivers include:

Reported NAV (less unfunded commitments)
Quality and experience of the GP
Remaining duration until expected exit
Market context: interest rates, volatility, capital availability, and demand for secondaries

Secondary transactions are contractual transfers of fund interests or private shares and require deep structural analysis of the existing investment vehicle.

Common formats:

LP Secondaries: purchase of fund LP interests, including unfunded commitments—executed through assignment agreements, GP consent, and a negotiated NAV discount.
GP-Led Continuation Vehicles: asset migration from legacy vehicles into new ones, where the secondary fund acts as lead investor under updated terms.
Direct Secondaries: acquisition of private company shares—with Put/Call mechanics—outside formal fund wrappers, often involving founders or early backers.
Stapled Deals: combined secondary acquisition and primary commitment to the GP’s follow-on vehicle under preferential conditions.

Financial structure features:

NAV discount: typically 10–30%, depending on asset quality and remaining duration.
Residual commitments: buyer assumes future capital obligations.
Cash flow modelling: detailed forecasts include projected payouts, fees, taxes, and fund obligations.
Operational due diligence: legal, structural, and GP alignment review

Key Advantages:

Shorter Investment Horizon: Accessing seasoned assets accelerates time to cash realization.
Greater Transparency: Mature portfolios provide detailed performance and asset-level data.
NAV Discounts: Buying below NAV yields upside as underlying assets are realized.
Broad Diversification: Exposure to multiple funds, sectors, geographies, and vintages reduces concentration risk.
Improved Cash Flow Visibility: Due to maturity, projected returns are more accurately modelled.

Primary Risks & Management:

Valuation Inaccuracy: NAV may not reflect latest performance; mitigated by rigorous due diligence and conservative valuation models.
Asset Quality Risk: Weak fund managers or troubled assets can degrade performance; addressed by screening and continuous monitoring.
Regulatory & Transfer Restrictions: GP approval and fund terms may delay or block transactions; resolved via early legal review and thorough GP engagement.
Residual Illiquidity: Portfolio companies may lack ready exit pathways; managed with realistic payout schedules and flexibility in structuring.

Summary

Secondary funds have become a preferred conduit for private market allocation—offering quicker exposure, built-in diversification, and clearer paths to liquidity compared to primary commitments. They serve as critical tools for institutional and private investors seeking efficient alternatives to frontier asset classes. However, maximizing their benefits demands specialized expertise in complex transaction analysis, fund mechanics, valuation, and sophisticated risk governance.

In conclusion, a diverse range of alternative investment funds are available in the market, and each entity is advised to make its own transactions based on the level of risk, current portfolio investments and the diversity of the portfolio, the need for liquidity and more.

Objective will be happy to provide objective advice on capital-raising funds.

The popularity of alternative investments is gaining momentum as traditional investments become more volatile due to a high correlation with the global economic situation and the rapid effects of speculators. On the other hand, alternative investments have a low correlation with traditional investments and therefore they form an investment channel that balances the portfolio and hedges the risks involved therein.

Objective makes the information accessible and accompanies you in the decision-making process

As opposed to public investments, which provide a large amount of accessible information, alternative investments are characterized by complexity, lack of information and a diverse range of investment channels. The difference between alternative funds, even between those engaged in the same field, is very wide, and thus it is highly important to acquire knowledge and complete understanding prior to making the investment.

Latest Analysis

Guide to Alternatives

Types of funds

Terms Glossary

Disclaimer