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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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
Qualified Opportunity Zone Investments Explained in One Chart
by email@example.com (Russell Putnam) on January 10, 2019 at 6:54 pm
This morning the Internal Revenue Service and Treasury were scheduled to hold a public hearing regarding the proposed Treasury Regulations on investment in qualified opportunity zone funds. However, the IRS cancelled today’s public hearing because of the ongoing Federal government shutdown. While government bureaucracy and partisan politics have delayed the finalization of the Treasury Regulations (an unfortunately my visit to the Smithsonian museums in Washington DC), it has not furloughed FactRight’s effort to create a comprehensive due diligence program for reviewing the QOZ funds that are starting to become available through the broker dealer and RIA channels. […]
Top 10 FactRight Blog Posts in 2018
by FactRight, LLC on December 20, 2018 at 9:28 pm
This time of year, we feel like Santa’s elves, working cheerfully in the due diligence workshop and advising clients as 2018 comes to a close. So it’s time to share our most popular blog posts on alternative investments from the past year, in case you missed any. The list includes: […]
How We Help RIAs Offer Alternative Investments to Clients - A Case Study
by firstname.lastname@example.org (Scott Smith) on November 26, 2018 at 7:42 pm
Recently, we took a look at how FactRight is helping Kalos Financial, a broker dealer active in alts, with its due diligence and compliance needs related to 1031 exchange programs. Today, we’re share another brief case study of an RIA that needed critical help in creating an alts platform under a fee-based model, and how FactRight is providing a turn-key solution. &nbs […]
How We Can Help Clients with 1031 Due Diligence - Kalos Case Study
by email@example.com (Scott Smith) on November 16, 2018 at 8:43 pm
Our clients are well acquainted with the third party due diligence we produce on alternative investments and their sponsors. And what we do there is easy to explain, because it results in a tangible report made up of independent research, findings, and conclusions of risk that BDs and RIAs use to make investment decisions.&nbs […]
Large Asset Managers Continue to Dominate Interval Fund Market
by firstname.lastname@example.org (Jacob Mohs) on October 30, 2018 at 6:27 pm
Interval fund asset growth accelerated slightly in 2018Q3. Total interval fund net assets equaled $26.2 billion as of the most recent public filings, up 50% compared to the prior year, and 13% compared to the prior quarter. […]
8 Important Questions Answered by Proposed Regulations on Qualified Opportunity Funds
by email@example.com (FactRight) on October 25, 2018 at 7:41 pm
Last week the Department of Treasury released highly-anticipated proposed regulations on investment in qualified opportunity zone funds (QOFs), a creature of the new Section 1400Z-2 of the Internal Revenue Code, enacted as part of 2017’s Tax Cut and Jobs Act. Investment into QOFs are to provide taxpayers with potentially significant tax incentives, which makes compliance guidance from Treasury so important to the myriad of constituencies that stand ready to direct a significant flow of capital into qualified opportunity zones (QOZs)—distressed communities around the U.S. that are eligible to benefit from the program. […]
Thank you for Making FactRight's Annual Conference A Success
by Jessica Ryan on October 11, 2018 at 5:40 pm
We are grateful to everyone who helped make this year’s FactRight Due Diligence Conference held last week our biggest and best yet! […]
The Alternative Investment Imperative for RIAs
by Daniel Wildermuth on October 3, 2018 at 7:39 pm
Advisory practices of all types have been growing steadily over the past several decades through applying various practice approaches and structures that emphasize their fiduciary responsibility to act in the best interest of the client. As fiduciaries, most advisors have utilized primarily or even exclusively public market securities such as individual stocks and bonds, mutual funds and exchange traded funds (ETFs) to deliver their professional investment services. […]
Addressing Environmental Risk for DSTs and Other Real Estate Offerings
by firstname.lastname@example.org (Brandon Raatikka) on September 26, 2018 at 6:57 pm
Assessing potential environmental issues is critical piece of due diligence for any prospective investor in real estate, given the potential liability exposure. Yet, environmental issues can often present the most complex and misunderstood aspects of a real estate transaction. […]
Is the Conservation Purpose Protected in Perpetuity?
by email@example.com (Russell Putnam) on September 13, 2018 at 8:51 pm
Under the Internal Revenue Code, to be deductible, a conservation easement must be made exclusively for conservation purposes, which requires that the conservation purpose of the easement must be protected in perpetuity. This means that restrictions on the use of the property will run with the land, in theory, forever. The legislative intent behind the perpetuity requirement was to provide for a legally enforceable restriction on the property owner’s use, and any subsequent property owners’ use, of the property that would be inconsistent with the articulated conservation purposes that the easement is protecting. […]