The Impact of Negative Interest Rates on Alternative Investment Funds
By Marios Charalambous, Manager at CPF Fund Administration
Negative interest rates are a phenomenon stemming from the 2008 global financial and economic crisis and were used by central banks to reinvigorate investment and productivity.
The intention was to encourage banks to lend and kickstart economic activity in order to revive the jobs market and reduce unemployment levels.
Ultimately, negative interest rates were part of an overall central bank policy which included quantitative easing (QE). The European Central Bank purchases bonds from commercial banks, thereby increasing the value of the bonds while encouraging low interest rates so that households and businesses can borrow more easily.
The underlying idea is to boost investment sentiment and restore confidence in the economy’s future. In practice, QE and negative interest rates help large economies like the Eurozone to get back on track but at the same time, they pressure banking sector profits.
Negative interest rates impact on AIFs
Declining returns on bank bonds and lower deposit rates for savers may make Alternative Investment Funds (AIFs) more attractive versus traditional investments. AIFs invest directly in economic activity and are able to exert heavyweight buying and selling influence through hedge funds, for example.
Another impact of negative to low interest rates is easier borrowing for investment, meaning that AIFs could potentially see more capital from borrowers seeking possible higher returns. From this perspective, AIFs keep cash flow circulating in the global economy at a time when negative interest rates are a disincentive to keep large sums of money locked in bank accounts.
As we face the unwelcome prospect of a global slowdown due to the coronavirus COVID-19 pandemic, AIFs will be needed more than ever to stimulate investment and restore confidence.
This could lead to an overall success story for alternative funds and the investors who position themselves strongly for the upcoming economic recovery.