Anything not a stock, bond, or cash investment is generally considered an alternative investment. Examples of common alternative investments include hedge funds, real estate investment trusts (REITs), private placement funds, closed-end 40 Act funds, and Reg A companies seeking capital.
Like a traditional stock or bond investment, alternatives have their pros and their cons. Disadvantages include the potential for high initial fees, less liquidity, and a longer investment horizon. But alternatives also can have distinct advantages over the traditional investment market, such as lower correlation to the broader markets, tax benefits, or protection against inflation. For the right investor or financial advisor, alternative investments can be a useful tool to diversify a portfolio.
When looking to outsource due diligence, you want to be sure you are getting a complete, unbiased picture of the investment or sponsoring organization. Good questions to ask are: How does the due diligence provider work with the sponsor? What other information sources do they use? What types of experts do they employ and what are their specific areas of expertise? Finally, what time frame can you expect to see information in? A report showing a well-rounded picture of an investment has much less value if the information is out-of-date. FactRight delivers up-to-date information that can be used to guide decision-making today.
This concern is very valid. Third party due diligence is often paid for directly by product sponsors, and the users of the report (the financial service professionals who work with alternatives) receive the information for free. Regulatory agencies have historically accepted seller-funded diligence as long as it remains impartial. We believe, however, that this method may come under increased scrutiny by regulators as the financial services industry more widely adopts fiduciary standards and principals.
How does FactRight remain impartial? By scrutinizing every piece of information available. Our financial and legal experts dissect the sponsor or offering, looking specifically for gaps in information or questionable interpretations. We also bring in data from other market-relevant sources to create a holistic, unsentimental picture of the sponsor/offering.
Once factual review is complete, the sponsor is allowed to verify the accuracy of the data from an abridged draft report—one without any discussion of risks, strengths, or conclusions or recommendations. Suggestions on this material are only considered if the sponsor can provide significant supporting evidence. When the report is finalized—including our overall findings—it is published on our Report Center, to which the sponsor does not have access.
For financial services firms that are interested in requesting their own sponsor-free due diligence reviews and platform recommendations, we offer our custom FR Risk Management service.
No one can keep their eye on everything all the time. FactRight’s team of financial and legal experts are always watching and reviewing the constantly changing environment of alternative investments so that you don’t have to.
At FactRight, we specialize in understanding and explaining the complex world of alternative investments. We determine where an investment is strong or risky and explain how fluctuations in regulations or the market will affect those investments. This is all we do and we do it well. Partnering with FactRight allows you to focus on the specific needs of your business and the individualized needs of your clients.
Recent Blogs from FactRight
The IPA's Latest Conversation on DST/1031 Investment Programs
by firstname.lastname@example.org (Brandon Raatikka) on May 16, 2019 at 5:53 pm
Wildfires Impact Interval Funds : A 2019 Q1 Update
by email@example.com (Jacob Mohs) on May 2, 2019 at 7:52 pm
This post is your guide to the interval fund market's key 2019 Q1 metrics and what's been impacting them—including natural disasters. […]
Second Round of Regulations Add Some Clarity Around Qualified Opportunity Fund Investments
by firstname.lastname@example.org (Russell Putnam) on April 25, 2019 at 6:07 pm
Last week, the IRS and Department of Treasury released a second round of proposed regulations on investments in qualified opportunity zone funds (QOFs). The proposed regulations clarify requirements that were not addressed in the initial proposed regulations released in October 2018. The IRS and Treasury are seeking comments and will hold a public hearing regarding the proposed regulations in June. Even though the regulations are merely proposed at this point, they reflect Treasury’s current approaches to many items that Section 1400Z-2 leaves open to interpretation and represent the best indication of where the final requirements will be fixed. […]
Our Best Insights on RIAs and Alternative Investments
by email@example.com (Scott Smith) on April 18, 2019 at 5:29 pm
As we continue to review offerings aimed at registered investment advisor distribution, and add more RIAs to our stable of customized consulting clients (read about new partnerships with Independent Financial Partners here and Mirae Asset Wealth Management here), I’ve been asked to compile of some of our recent blog posts on RIAs and their use of alternative investments: […]
Effectively Assessing Sponsor Prior Performance: Part 2
by firstname.lastname@example.org (Kemp H. Hanley) on April 4, 2019 at 5:40 pm
In a previous post, we looked at the challenges in assessing a sponsor’s track record, and regulatory and industry approaches to promoting consistent and accurate prior performance information. Today, we’ll discuss strategies for how to interpret sponsor track record information, including what factors can change the apparent meaning of what the sponsor presents. &nbs […]