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 A report showing a well-rounded picture of an investment has much less value if the information is out-of-date.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
- Highlights from FactRight's 7th Annual* Fall Due Diligence Conferenceby Kate@FactRight.com (Kate Stephany) on September 22, 2021 at 7:22 pm
*Technically, it's been eight years since our first fall conference on September 28th, 2014, but due to the monotony that was daily life in 2020, and that we didn't have a fall conference that year, and my brain thinks 2019 was last year. Oh, not you? Just me? Well then.
- Evaluating Alternative Investments - Is Chasing Yield Really Worth It?by Gail Schneck on August 25, 2021 at 4:59 pm
In today’s low interest rate environment, the search for yield is driving an increasing number of investment decisions. However, higher yield options are somewhat limited in more liquid investments, such as rated bonds or stabilized stocks or mutual funds, causing investors to seek out other avenues to achieve their income goals. Alternative investments are increasingly filling this need in today’s portfolio construction. However, such products are often selected based on quoted yield without taking into account the underlying risk-return tradeoff. The alternative investment industry may have lost track of appropriate compensation for the risk investors are assuming since stated yield often sells itself.
- Private Placement Due Diligence: Key Questions To Ask When Evaluating Opportunistic Fundsby firstname.lastname@example.org (Russell Putnam) on August 5, 2021 at 8:11 pm
The economic fallout and reduction in travel caused by the COVID-19 pandemic have caused significant dislocation within the hospitality sector. In doing so, this has created opportunities for investors to acquire hotel investments from distressed sellers and lenders at attractive prices. Over the last year, our team has reviewed a number of private opportunistic hospitality funds. These programs often provide the potential for attractive returns. Still, they include significant risks given the distressed nature of the targeted assets and the possibility that market conditions or asset-specific recoveries are delayed or never come to fruition.
- Top Five Attributes of a Successful Alternative Investment Sponsorby email@example.com (Kemp H. Hanley) on June 23, 2021 at 5:07 pm
During my tenure at FactRight, we have conducted operational due diligence on more than 150 alternative investment sponsors. Some have been very large, some very small, and many in between. I consider myself very fortunate because I enjoy the work. I enjoy getting to know the people, learning about their experience, about their investment process and how they envision growing their business. Some of the due diligence process is inevitably tedious, and to a certain degree repetitive, but ultimately no two companies are alike and that is what makes it always interesting.
- 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: