The Alternative Investment Due Diligence Checklist

Alternative investments (e.g. real assets, private credit, opportunistic strategies, and other non-traditional holdings) can offer portfolio diversification and differentiated return opportunities beyond stocks and bonds. However, these investments also carry distinct risks. The difference between a strategic allocation and a costly misstep often comes down to the quality of the due diligence conducted before committing capital.

A comprehensive alternative investment due diligence checklist can help guide the evaluation process:

• Verify the track record of the investment sponsor, operator, or manager
• Evaluate investment strategy and philosophy
• Analyze fees, terms, and redemption provisions
• Assess risk management and downside protection measures
• Review legal documents and regulatory compliance history
• Confirm sponsor or decision-marker capital and alignment of interests
• Understand liquidity terms and exit options

Working with a wealth management team can offer access to deeper analysis, professional networks, and the time-intensive evaluation that alternative investments require. Schedule a conversation with Avidian Wealth Solutions to discuss how our approach to strategic alternative investments evaluation may complement your family’s wealth management strategy.

Verify track record and experience

Thorough sponsor, operator, or investment manager due diligence begins with examining the track record of the individuals or organizations responsible for executing the strategy or operating the underlying assets. This includes reviewing historical performance across different market cycles, understanding how long key personnel have been with the firm, and evaluating their experience in the specific asset class. Sponsors or operators who have only executed strategies during favorable market conditions may lack the experience needed to navigate adverse environments.

Team stability and depth matter significantly in alternative investments. High turnover among investment professionals can signal organizational challenges, while a cohesive team with complementary skills may be better positioned to execute the stated strategy. Understanding who controls capital allocation, asset management, and exit decisions — and their relevant experience — may offer insight into the consistency and sustainability of the investment’s approach.

Evaluate investment strategy and philosophy

Understanding exactly how an alternative investment intends to generate returns is fundamental to determining whether it aligns with your portfolio objectives. Different alternative investment strategies involve varying time horizons, liquidity profiles, and return expectations depending on how capital is deployed and returns are generated. A clear articulation of the competitive or strategic advantage — whether through asset sourcing, operational experience, structural position, or analytical capabilities — helps assess whether the strategy has merit.

The investment philosophy should also address how the manager approaches different market environments. Some strategies perform better in bullish vs. bearish conditions, while others aim for more consistent returns regardless of broader market direction. Evaluating whether the strategy complements your existing holdings and whether its assumptions about market behavior seem reasonable can help determine appropriateness for your portfolio.

Analyze fees, terms, and withdrawal provisions

Fee structures in alternative investments typically involve multiple layers that can significantly impact net returns over time, and may include:

• Asset-level fees
• Management or oversight costs
• Performance-based incentive
• Profit-sharing arrangements
• Various administrative charges

These fees should all be clearly understood and compared against industry benchmarks. Even liquid alternative investments with defined liquidity features often carry fee structures that differ substantially from traditional investment vehicles.

The terms governing capital commitment, access, and withdrawal can vary widely among alternative investment funds and structures. Lock-up periods may range from months to years, and withdrawal provisions may include notice periods, restrictions that limit access to capital during stress periods, or penalties for early exits. Understanding these constraints in the context of your liquidity needs and overall financial plan helps prevent situations where capital becomes inaccessible when needed.

Assess risk management and downside protection measures

Effective risk management frameworks are essential for evaluating how an alternative investment manages exposure, concentration, leverage, and operational risk. This includes understanding limits on leverage, concentration constraints, counterparty exposure, and the specific mechanisms used to monitor and control risk throughout the investment process. The presence of documented risk controls and decision-making protocols — and evidence they’re actually followed — can differentiate professionally managed operations from those with weaker oversight.

Downside protection measures vary significantly across alternative asset management strategies. Some managers employ hedging techniques, stop-loss disciplines, or diversification requirements designed to limit losses during adverse market conditions. Understanding what has historically triggered losses in the strategy and how the manager responded provides valuable insight into their risk management effectiveness during real-world stress scenarios.

Review legal documents and regulatory compliance history

Alternative investment due diligence requires careful review of all legal documentation, including offering memoranda, operating agreements, investment agreements, and subscription documents. These materials outline the rights and obligations of all parties, potential conflicts of interest, and the legal structure governing the investment. Applicable regulatory filings, asset-level disclosures, or jurisdictional compliance can reveal past enforcement actions, investor complaints, or operational issues that warrant further investigation.

The compliance history of both the investment vehicle and the management firm deserves scrutiny. This includes reviewing any regulatory examinations, litigation history, and how the firm has addressed past compliance deficiencies. While a completely clean record isn’t always realistic for long-tenured firms, patterns of repeated issues or serious violations can signal cultural problems that may affect future operations and investor protection.

Confirm manager capital commitment and aligned interests

The amount of personal capital that sponsors, operators, or key decision-makers have invested alongside other investors serves as a meaningful indicator of alignment. When decision-makers have their own wealth at risk in the same investment vehicle, incentives tend to align more closely with those of outside investors. The absence of significant sponsor capital — or exemptions that allow sponsors to withdraw capital under different terms than other investors — can raise questions about conviction and commitment.

Alternative asset management relationships work best when all parties benefit from successful outcomes and share in negative ones. Understanding how incentive compensation, profit participation, or outcome-based rewards are structured (relative to investment performance), whether there are clawback provisions for underperformance, and how the general partner’s economics are structured relative to fund performance provides insight into true alignment. Some structures create incentives for excessive risk-taking, while others may be overly conservative in ways that don’t serve investor interests.

Understand liquidity terms and exit options

Liquidity provisions represent one of the most critical considerations when investing in alternative assets, as capital may be locked up for extended periods. The specific terms governing when and how you can exit an investment vary dramatically — some alternative investments offer defined liquidity events, while others rely on asset disposition, refinancing, or long-term holding periods to generate exits. Understanding these constraints relative to your cash flow needs and other financial obligations is essential before committing capital.

Different asset classes present distinct liquidity profiles that should inform allocation decisions. Investing in the real estate sector, for example, typically involves longer lock-up periods than certain hedge fund strategies, while certain illiquid alternative strategies may involve multi-year holding periods before capital is returned. The liquidity characteristics of alternative investments should be considered alongside your types of investment accounts and overall portfolio construction to help maintain appropriate access to capital across your financial plan.

What are the challenges of conducting thorough due diligence?

Even for families with substantial wealth, conducting institutional-quality due diligence on alternative investments can present significant practical challenges. The process requires dedicated time, specialized expertise across multiple disciplines, and access to professional networks that most individual investors — regardless of net worth — simply don’t maintain.

The primary obstacles to effective due diligence include:

• Time intensity: A thorough evaluation of a single alternative investment opportunity can involve dozens of hours analyzing complex legal documents, financial models, and operational infrastructure
• Specialized expertise: Understanding sophisticated structures requires knowledge across legal, tax, operational, and investment domains
• Institutional access: Proprietary databases for performance verification, professional networks for reference checks, and established relationships with investment managers that allow for deeper transparency
• Multi-strategy complexity: Evaluating alternative investments across diverse asset types, structures, and execution models requires distinct skill sets

The knowledge and resources required to properly evaluate alternative investment opportunities represent a full-time discipline rather than something that can be effectively managed alongside other responsibilities. Many alternative investment structures also involve nuanced terms and implications that can benefit from professional analysis tailored to your specific tax situation and overall financial plan.

Discuss your alternative investment strategy with experienced professionals

Building and executing on an alternative investment due diligence checklist often requires more than just awareness of what to evaluate — it demands the time, research, and institutional resources to conduct meaningful analysis on each opportunity.

Avidian Wealth Solutions works with ultra-high-net-worth families in Houston, Austin, Sugar Land, and The Woodlands, offering dedicated alternative investment evaluation across real assets, private credit, and more as part of comprehensive wealth management. Our team brings institutional-quality due diligence capabilities, professional networks, and specialized expertise to help assess whether specific opportunities may align with your family’s financial objectives.

Schedule a conversation to discuss how our approach to alternative investment analysis may complement your wealth management strategy.

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