Alternative Funds 2025

A Global Overview of Alternative Funds

Alternative funds – private equity, hedge funds, private credit, venture capital, real estate, infrastructure and impact‑oriented vehicles – increasingly play a central role in global investing. 2025 is shaping up to be a good year for alternative funds. While interest rates have remained on the high side, the prospect of future cuts brings a more favourable environment for deal-making and higher asset valuations. A focus on decreasing regulatory burdens, at least in the United States, has also stimulated deal-making. As exits become more feasible, more capital flows into alternative funds.

The public markets are becoming more concentrated in a handful of well-known companies, which reduces diversification and can increase volatility. As a result, investors continue to favour the prospect of diversification, long-term value, and exposure to private investments and strategies available through alternative funds. Institutional investors, high net worth investors and global regulators have a growing interest in hybrid/evergreen/semi-liquid funds as a means to such opportunities but are also mindful of the risks.

Meanwhile, technology is advancing with rapid developments in artificial intelligence (AI), tokenisation, digitisation, sustainability and other areas. Regulators around the world are striving to stay ahead of these trends, through both the development of new regulation and the pursuit of enforcement matters.

These trends continue to spur sponsors and investors in alternative investments to be nimbler and more creative, but also more resilient, and they require (i) an increased focus on a strong compliance culture, (ii) careful attention to tax and legal structuring, (iii) engagement on valuation and liquidity issues, and (iv) clear communication and transparency with investors and regulators. For legal advisers in particular, the task is increasingly complex.

Global economic and political context

The theme of 2024 was a gradual focus on interest rate cuts, leading to a welcome reversal of the trend of higher costs of capital/financing in recent years and hoping for a thaw in the market for exits. In 2025, the thaw did materialise, and at the same time geopolitical risks and trends have morphed, so they are not merely influencing markets but are causing a realignment of the global power structure and global economy. Globalisation and free trade is giving way to tariffs, trade disputes, nationalism, conflict and competition between nations. In the meantime, we are experiencing uncertainty and instability which require rethinking traditional investment methodologies and products. It is no surprise, then, that the hottest topics include AI, digitisation/tokenisation, and retailisation of alternative funds.

As these hot topics emerge, global regulators are striving to keep up, focusing more on compliance and enforcement as deregulation takes effect Nevertheless, potential deregulation in the USA may help shift to create new opportunities. We have already seen the United States Securities and Exchange Commission (SEC) staff provide guidance facilitating private placements with large minimum investments instead of requiring burdensome verification of an investor’s financial position and loosen a prior staff policy limiting certain registered funds’ ability to invest in private funds. Also, we have an Executive Order directing the exploration of the use of alternative investments in retirement accounts and proposed legislation (not for the first time) to open up the standard for being an “accredited investor” eligible to participate in private placements. In the UK and EU, there is also a re-examination at the legislative level of the “professional investor” criteria to allow greater access for high net worth or mass affluent investors. In the meantime, as in the USA, certain sponsors are also using retail products such as the Luxembourg Part II UCI Fund or European long-term investment fund (ELTIF). In APAC, sponsors are facing increased scrutiny of their marketing practices for private offerings due to the focus on expanding the universe of investors and increasing investor demand for these products. Regulators will need to get ahead of these trends to help establish appropriate but not overly burdensome guardrails as alternative investments and strategies become more broadly available.

Several bright spots

The rebound in the private equity market has allowed funds to deploy their “dry powder”, particularly in growth-oriented or undervalued assets. Sponsors in both private equity and venture capital are not only investing in AI but also deploying AI strategies in their portfolio companies to be more operationally efficient and enhance decision-making.

AI is also driving a need for more energy, with increased investment in infrastructure and in data centres that have a huge appetite for energy, power generation and related digital infrastructure. To the extent that interest rates and therefore borrowing costs lower, or inflation increases, we can expect to see more real estate investing and capital investment in the infrastructure sector.

Credit funds, particularly those engaged in direct lending, real estate and infrastructure debt, continue to grow in size and stature, while many benefit from a differentiated strategy. Global regulators are increasingly focused on “non-bank financial institutions”, which could curtail investment activity and limit access to financing especially outside of the USA. The credit funds space has led the development of the hybrid or evergreen structure, which is a deliberate structuring to match the liquidity of the fund with the liquidity of the portfolio assets. In the USA, fund structures may include those electing to be treated as “business development companies” (BDCs) or “interval funds” under the Investment Company Act of 1940 (“40 Act”), each of which presents a tax-efficient structure for non-US investors. In the case of mortgages and other real-estate-related debt, non-traded real estate investment trusts or even interval funds under the 40 Act provide similar liquidity and tax efficiency.

The secondary market for private assets is also strong, with continuation funds and GP-led secondaries providing much-needed liquidity for investors with long-held assets. Notably, secondaries are expanding from the private equity, real estate and infrastructure sectors to include more credit, venture and other assets.

Last but not least, hedge funds have seen the strongest inflows of the last decade, and their strategies have demonstrated that they can benefit from market dislocations and uncertainty. Global trade and rates uncertainty have provided macro funds opportunities that have been harder to capture in recent years, and in general hedge funds have benefited from the ability to hedge in volatile markets (including with long/short strategies). With the high returns in public equity markets, hedge funds may represent an attractive opportunity for uncorrelated returns with downside protection.

Artificial intelligence, technology and blockchain/tokenisation

In addition to driving certain investment themes, AI is becoming more commonly used by managers for their own operations and within their portfolio companies. It is an area in which managers need to keep a watchful eye on compliance and regulation, particularly with increasing focus on the regulation of cross-border investing and concerns about cybersecurity and privacy.

Technology is also the driver for many fintech platforms that are democratising access to alternative investments through distribution channels. These platforms can facilitate fractional ownership and smaller minimum investments, but managers will want to consider carefully the appropriate limitations around sales efforts in the hands of third parties.

Finally, 2025 is witnessing an uplift in the use of blockchain technology to tokenise or represent digitally both physical and intangible assets. Tracking and trading these assets may become much easier, but whether that is a benefit to many alternative strategies remains to be seen. In addition, the speed of adoption of these technologies has raised concern over compliance with existing laws and regulations, and has generated a surge of interest from legislators and regulators.

“Retailisation”/democratisation

High net worth investors present an opportunity for alternative fund managers facing challenges in institutional fundraising, particularly as the economy has not been kind to traditional 60/40 stock/bond portfolios, and the most recent trend is that these investors (and their advisers) are driving demand for alternative investments. The widely held view is that financial advisers to wealthy individuals have offered portfolios that are significantly underweight in alternatives, leading to an increased demand for both new products and distribution.

Distribution opportunities arise through fintech or other platforms. In some cases, an existing fund is offered (directly or by means of an access/feeder fund) with less control by the manager over the sales and investor communication process. Alternatively, managers create new products, such as registered interval funds, BDCs, ELTIFs or Luxembourg Part II UCI Funds, that may not be subject to the same regulatory regime as purely retail products but are more regulated than alternative funds. Managers must consider the relative benefits, costs and risks of these differing approaches. Regulators are also considering these issues, and we can expect additional regulatory focus through new requirements, enforcement action, or both.

Fund and fee/expense structures

A continuing trend is the increasing creativity employed when establishing investment strategies, when structuring funds, and when executing on investment programmes. Exchange-traded funds (ETFs) are now offering private credit and other strategies. Managers are engaging in joint venture arrangements globally to link the ability to administer or distribute a product with the ability to manage an alternative strategy. In the USA, many of these joint ventures are focused on bank-maintained “collective investment trusts” that can be made available to benefit plan investors, including 401(k) plans (but not individual retirement accounts). Target date and other multi-asset strategies are increasingly incorporating a less liquid strategy as part of a long-term investment plan.

Managers are also offering co-investments (directly or through co-investment funds) and offering tailored fees and services (including separate account management). Fees and expenses remain an area of focus, both as investors seek to target better net returns and as regulators focus on transparency. Even in a regulatory environment focused on deregulation, supervision and enforcement of basic disclosure and conflict of interest considerations remain paramount.

Given increasing costs, expenses continue to be passed through (including manager costs such as internal legal and accounting, and the use of affiliated service providers) subject to regulatory focus on clear authorisation, proper calculation and transparent reporting. The multi-strategy “pass-through” model has produced some of the strongest returns in recent years, with the pass-through model offering both the opportunity to compete for talented investment teams and the ability to develop or acquire and deploy innovative technologies that can enhance investment and operations.

Co-investments

Co-investment opportunities remain a popular strategy to attract investors and lower investors’ overall costs. Managers in this context must be attentive to appropriate tax and legal structures and whether to create a vehicle and/or run a formal programme, as well as to disclosure of conflicts of interest both to the co-investors and the main fund investors, which requires anticipation of issues when raising a closed-end fund. Navigating co-investment opportunities requires clear communication, transparency and a thorough understanding of the legal and regulatory implications to manage relationships with investors successfully and avoid regulatory issues.

ESG considerations

Europe remains ahead in pursing ESG principles and in related regulation. In the USA, the issue has largely faded in the wake of other political priorities. Managers continue to struggle with the accessibility and reliability of ESG-related data, and key themes include ensuring a manager is doing what it has said it would do from an ESG perspective. Here too, regulators in the USA and Europe have pursued enforcement and litigation claims.

Regulation and compliance

As the markets and technology are accelerating, so too is the regulatory environment. In Europe, AIFMD2 is required to be implemented into member state law by April 2026. Amongst other things, it recognises loan origination as a core activity of an alternative investment fund manager. There is no pan-EU lending passport as such, but there is some expectation that it will be easier to make loans on a cross-border EU basis with these new permissions.

In the prior US administration, SEC rule-making (some of which has been rejected by the courts) had been a focus. Today, the SEC and other regulators are still seeking to enforce principles through litigation and enforcement actions, but are also looking for alternative means of providing guidance to managers and funds (through no-action letters, interpretations and exemptive relief).

Numerous other regulatory issues affect managers and funds, including:

• review of merger transactions by the US Federal Trade Commission and the US Department of Justice as well as non-US antitrust agencies;
• increasingly stringent anti-money laundering and ‘know your customer’ requirements;
• the Committee on Foreign Investment in the United States and foreign direct investment requirements; and
• beneficial ownership reporting under Sections 13(d) and 13(g) of the US Securities Exchange Act of 1934, as amended.

Furthermore, numerous other global regulations that are pending or have recently been adopted are increasing the regulatory and compliance obligations for alternative investment funds and their managers.

Where to organise/operate?

In this environment, the selection of a jurisdiction in which to organise and operate a manager and its funds is increasingly important. This Practice Guide is designed to give an overview of various jurisdictions and provide a broad overview of key considerations. At the highest level, a prospective fund manager will want to consider both the investment strategy and expected jurisdiction of portfolio investments, and the location and type of prospective investors. Certain strategies, such as private credit, entail significant tax considerations, and careful planning is essential. Increasingly, the regulatory regimes in which a manger and its funds operate and invest generate compliance costs and restrictions requiring detailed legal analysis. Carefully tailoring jurisdictional choices to the needs of the business and investors, rather than relying exclusively on past practice or trends, is essential to building a successful alternative investments business.

GP stakes and other transactions or partnerships

This environment has proven rewarding for larger and more established managers (and well-credentialled new managers/spin-outs). Accordingly, the industry is seeing more consolidations and acquisitions of managers, with banks and other traditional asset managers acquiring teams and capabilities, including on a cross-border basis. There is also increased activity in the global “GP stakes” markets, where managers can sell a portion of the firm and general partner (hence the term “GP stakes”) and raise additional capital for new initiatives, secure anchor investments for their funds/strategies or facilitate a generational transition of the firm. In some cases, a GP stakes or other third-party investor can also provide strategic guidance or access to new channels for distribution or investing. Strategic partnerships are emerging as a new strategy to couple alternative investing strategies with retail or high net worth distribution capabilities, and more traditional portfolios. These transactions require careful structuring and negotiation but can offer opportunities for alternative fund managers seeking to plan for the future in an increasingly competitive and fast-moving environment.