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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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
- Private Placement Due Diligence: Your Guide to 506(b) vs. 506(c)by Kate@FactRight.com (Kate Stephany) on May 12, 2021 at 5:30 pm
If you are thinking about putting an investor in a private placement one of the first questions you should ask is:
- What's in FINRA's 2021 Examination and Risk Monitoring Program Report That Could Impact Your Firm's Private Placement Offerings?by email@example.com (Lynn Lawson) on April 28, 2021 at 8:41 pm
Lynn Lawson, Esq. is the founder of Advertising Regulatory Consulting, LLC, which provides advertising and marketing guidance to broker-dealers, registered investment advisors, product sponsors, and financial services industry associations. Prior to starting Advertising Regulatory Consulting, Ms. Lawson served as a manager in FINRA’s Advertising Regulation Department for 22 years. Ms. Lawson has advised product sponsors that FactRight has covered, and given her experience at FINRA, we believe she can be a valuable regulatory resource for product sponsors and wealth managers who are distributing alternative investments.
- Key Due Diligence Considerations for UPREIT Exit Transactions for 1031 DST Programsby firstname.lastname@example.org (Brandon Raatikka) on April 15, 2021 at 6:00 pm
Many sponsors of DST programs are including section 721 UPREIT options in their potential exit strategies. Several factors are likely contributing to this evolution.
- Highlights from FactRight's 2021 Spring Due Diligence Conferenceby Jessica Ryan on April 1, 2021 at 7:26 pm
Here at FactRight, we want to take a moment to say thank you to all the financial advisory firms and sponsors alike, who took time out of their busy schedules to join us last week in Scottsdale for FactRight's 2021 Spring Due Diligence Conference. With record-breaking attendance, we couldn't be more grateful for your support and appreciate all the positive feedback we have received from so many of you.
- NFTs: A New Class of Alternative Investments?by Gavin Aydt on March 9, 2021 at 7:14 pm
The newest craze in the world of digital assets, cryptocurrencies, and blockchain is non-fungible tokens (NFTs). NFTs are unique digital assets that represent tangible or intangible items. The tokens are used to provide verification of ownership over the assets and prove their authenticity and rarity. NFTs are the first digital signature that you cannot counterfeit and are run on a blockchain and stored in online wallets like other cryptocurrencies. A primer on NFTs can be found here at Forbes.