Guide to Alternatives

Objective’s Knowledge Center

Below are basic terms used in the Alternative Investments Sector, involves multiple professional definitions and terminology. You may wish to take a minute before you start reading our analyses and take a look at the following list, which contains important terms for your financial jargon.

An individual or institution with a high net worth, either as a result of his/its annual activities or the financial wealth owned by him/it. There are many funds in which only Accredited Investors are allowed to invest. To earn this status, the financial wealth of such investor should meet one of the following tests established in the March 2016 Addendum to the Securities Law: (a) the Asset Value test – the value of the liquid assets owned by the investor (financial assets, deposits and cash) exceeds NIS 8 million; (2) the Income test – in each of the past two years, the investor’s income has exceeded NIS 1.2 million, or the income of the family unit to which he belongs exceeded NIS 1.8 million; (3) the Combined test – the total value of liquid assets owned by such investor exceeds NIS 5 million, and in each of the past two years it has exceeded NIS 600 thousand, or the income of the family unit to which he belongs exceeds NIS 900 thousand.

The administrator’s duties include management of investor accounts, calculation of management fees, preparation of financial statements, management and technological backup of account books and registration of investors, calculation of the net asset value of the fund and of each investor’s investment, calculation of internal return rate (IRR), and assistance in the preparation of management reports.

A mechanism that calculates the fund’s performance fee on the excess return after the target return is met. If a catch-up mechanism is in place, the fund receives performance fees from the total earnings. For instance, if the performance fee is set at 20% above the 8% under the catch-up mechanism, then, should the fund obtain a 10% return, the investor receives an 8% return and the fund receives a 2% return. In the absence of such mechanism, in the case of a 10% return, the fund only receives 20% above the target return, i.e., 20% of 2%, which is 0.4%.

A fund with a fixed lifespan that typically does not allow redemptions or the entry of additional investors after the initial formation of the fund. Closed-end funds typically acquire a portfolio of companies/assets during an initial investment obligation period where the money can be called, and the investment is spread over this period. Funds have the option to ask investors to extend their lifespan, if additional time is needed to liquidate the assets.

Direct investment in an asset backed by a fund, mostly in reliance on the abilities of the fund manager. In most cases, the fund’s need for co-investment is derived from the size of the investment and the fund’s restrictions or risk management, and then the limited partners are called to make an additional capital contribution. It is customary, around the world, that in most cases the investment does not entail extra payment to the fund managers, other than management fees and performance fees for the component invested as part of the contribution obligation to the fund (although changes may occur also in this regard).

Raising funds provide investors with a document containing questions that are common among investors when considering an investment fund. The key issues contained in the document include general information about the general partner (GP) and the fund, the investment strategy and process, the market environment, the terms and conditions of the fund and its past performance.

The partner in a limited partnership that is responsible for all partnership management decisions. The general partner is responsible to act for the benefit of the limited partners and is fully responsible for the fund’s activities.

A mechanism that addresses the problem of the fund’s reward for poor performance. This mechanism ensures that the performance fee is only based on net new gains for each investor. The fund may not charge management fees until it recovers the losses for the investors, and only then performance fees are calculated. Should performance fees be charged, the collection date will serve as a new zero point for calculating performance fees.

The level of return to be obtained by the fund before it may charge performance fees.

Impact Investments, also known as Social Investments, are a relatively new term that has gained momentum in recent years. The objective of these investments is to generate a measurable social or environmental return, alongside an economic return. In order for an investment to be defined as an Impact Investment, two conditions must be met: (1) there should be an intention to solve a social problem with a measurable social impact; (2) there should be a business model that aims to generate an economic return.

A typical metric used for measuring performance and evaluating the feasibility of an investment. In technical terms, IRR is the discount rate, which makes the present value of the payments (e.g., a series of investments) equal to the present value of the receipts (the returns on the investments).

This means that IRR is the discount rate at which the net present value (NPV) of a set of future cash flows will equal zero. When budgeting capital, the interest rate that makes the net present value (NPV) of the cash flow equal to zero is often used.

In simple words, IRR calculates the return to be earned by the company should it expand or make its own investments instead of investing its money elsewhere. In evaluating the feasibility of an investment, the metric is used to evaluate whether the internal rate of return (IRR) is higher than the general price of the capital, in which case the investment is worthwhile, or lower than such price, in which case the investment is not worthwhile.

At the early stages of the fund, the investor’s revaluation may be negative (in relation to the amount of the investment) and even produce a loss. Mainly due to management fees and transaction expenses, in a manner that does not reflect the investment’s future performance. Thereafter, the cashflow becomes positive, and the value added to the property due to the fund manager’s skills, are reflected by a sharp increase on the curve, which is best observed when the investment is realized and corresponds the highest point on the curve. J-curve is the graph that shows this decrease, which is then followed by a greater increase, shaped similarly to the letter J.

For investors, this means that although they allocate funds to a private equity fund already from the start of its operations, a positive cash flow, which reached its peak upon the realization of the asset,  is only observed in the third or fourth year. In the case of an income-producing property, regular distributions will be made based on available cash flow, after capital investments in property improvement.

In investment funds, it is customary to define both a key person and a mechanism for the exit of such a key person, aimed to mitigate the negative impact on the fund’s investments. A key person can be a manager or a number of managers in the fund who are substantially involved in the fund’s activities and the day-to-day management of its investments. The choice to invest in the fund is, among other things, a choice in people, so there is a concern, on the part of the investors, that a key person might leave which will lead to a significant and dramatic effect on the fund’s activities. It is customary to establish a mechanism for a “principal event” that occurs when a key person exit or reduces the scope of its activity. In such cases, the fund is obligated to notify investors and sometimes even provides the option to leave the fund, terminating new investments until a new appointment is approved by the investors, and more.

An investor that provides financing to the partnership to enable it to operate, and thereby becomes eligible to participate in and benefit from its profits. The investor’s liability for the Company’s debts is limited to the amount contributed by such investor to the partnership, and nothing beyond that. This means that should the partnership fall into debts; the limited partner only risks the amount of capital contribution it originally put forth. The investor has rights and obligations in accordance with the fund’s policy.

An agreement that defines the relationship between the general partner and the limited partners. An LPA starts with a comprehensive and detailed set of definitions that thoroughly explain the meaning of all relevant terms included in the document. The core of the agreement is dedicated to other material aspects, such as the partners’ responsibilities, names, objectives, commencement and duration, and the primary place of business.

Another part explains the manner of investment through capital or debt, and includes details of all possibilities that may be encountered by the investors, such as the maximum number of days to carry out the necessary activities, the general partner’s rights in connection with capital increase, and all activities necessary for the formation of the fund.

Alternative investment funds are limited in terms of liquidation options and there is a difference between open-end and closed-end funds.

In closed-end funds, investors cannot withdraw their investment until the end of the fund’s lifecycle. Investors in closed-end funds will be able to liquidate their investment funds only by selling it on the secondary market, subject to the approval of the fund’s general partner.


On the other hand, in open-ended funds, the investment can be liquidated every predetermined intervals  (monthly\quarterly), and after a blocking period. Generaly, as a fund sees withdrawal requests, it must comply with the redemption conditions, as detailed in the fund’s offering memorandum.
Among some of the funds, there is a limit on the maximum withdrawal prior to maturity (or other detailed events), following which it is possible to end the liquidation period in the fund. Therefore, investing in open-ended funds contains an exposure to liquidity risk in the event of high redemptions by investors.


In situations of overdrafts, the funds can activate different mechanisms of blocking redemptions or deploying them. The reason for this lies in the fact that although the funds usually keep a certain percentage of the money as cash for liquidity purposes, the invested fund assets are not liquid. The funds are interested in letting investors liquidate their investments, but on the other hand, they are careful not to sell assets under pressure, so that the existing investors do not suffer losses.


In addition, withdrawing from the fund, mainly without raising new money, reduces the funds available to the fund and its ability to make new investments. This also reduces the fund’s ability to maximize its return for existing investors. As a result, many funds have created various liquidity mechanisms and liquidity limitation, which allows them to continue to manage the portfolio in an optimal way on the one hand, as well as to allow some liquidity for the withdraws on the other hand.

Usually, after the fund’s stabilization period, which may take several quarters, the funds return to the normal liquidity mechanism. Changes in funs’ liquidity mechanisms created more focus on this parameter. Many investors are looking into this process and are taking into account the liquidity facros of the funds.

The LTC is a calculation used in commercial real estate construction. This ratio is calculated as a percentage of the loan to the cost of the property, which is usually used as collateral for the loan, and helps the lender (usually a mortgage loan) determine its risk and  interest.

The higher the LTC ratio, the riskier the loan. The difference with the LTV ratio is that it compares the total loan given to the project against the value of the project after its completion (and not its construction cost). Therefore, the LTC ratio is more conservative because no capital appreciation is embodied in the project after its completion.

It is customary to use this ratio in real estate development deals, where the risk is higher than yielding real estate projects, so that if there is a need to exercise the collateral before it is completed the value will reflect the state of the project in a better way.

The LTV ratio is a lending risk assessment. It’s calculated as a percentage of the loan from the value of the property used as collateral for the loan. This ratio helps the provider of a loan, usually a mortgage loan, to determine both its risk and its interest. The higher the LTV ratio, the riskier the loan.

For example, when a person takes a loan from the bank to buy a house, usually the house is the main – if not the only – security of the bank to guarantee the repayment of the loan. The more equity the borrower uses, the bank is more secure. This allows the lender to grant the mortgage easyer – and  demands lower interest rate.

If the mortgage holder goes bankrupt and has to transfer the ownership to the bank in exchange for the loan – it will be easier for the bank to repay the debt through the sale of the house, even if this sale is carried out quickly and at a price lower than the market value.

This term is relevant to open-ended funds where the fund establishes a mechanism that allows the investor to redeem participation units. It is generally acceptable that, after the Lock-Up Period defined in the fund’s policy, the investor may redeem his investments at the end of each quarter, with 90 days prior notice. Where many investors seek to withdraw their investments, some funds may defer the redemption if the total redemption requests exceed a certain percentage of the asset value. In such a case, the fund may decide to suspend the redemptions for a fixed period of time, a partial repayment which will be divided pro rata among the applicants or a spread of the redemption for a certain period of time.

An annual fee charged to investors by the fund manager for as long as they are invested in the fund, with the amount of the fee varying according to the nature of the fund. Management fees are generally paid from the investor’s capital contribution to the fund. Some funds collect management fees only from the actual investments.

A fund with no finite or limited lifespan that allows the continuous entry and exit of investors, except during the Lock-Up Period, following which monies can be redeemed. The fund calls the investors to make their capital contributions on one occasion and executes the investments accordingly. Generally, investments in this type of funds are relatively liquid, to allow the fund to make its investments based on the value of the capital contribution made to the fund.

 A fee charged to the investor to reward the fund manager beyond a predetermined return threshold. This fee normally amounts to 20% of the fund’s return.

A legal document furnished to prospective investors when raising capital. The document reveals all information that the investor should be aware of to make a reasoned investment decision prior to making an investment. The PPM sets out, inter alia, the investment opportunity as well as legal obligations, and explains the risk of losses. The disclosures included in the PPM vary depending on the complexity of the offering and its terms and conditions.

Defined as the first year of investment in the fund. Particular importance is attached to this term as a criteria for comparison between different funds. Each year is characterized by a different economic environment, and therefore, special focus is given to the comparison between funds from the same vintage.


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