Alternative investments—such as private equity, real estate syndications, hedge funds, crypto assets, and art—offer diversification, higher return potential, and access to unique markets. But with opportunity comes risk. These assets are less regulated, often illiquid, and require thorough due diligence.
In this guide, we’ll show you step-by-step how to evaluate alternative investments to make informed, confident decisions.
Table of Contents
- 1 What Are Alternative Investments?
- 2 Why Evaluation Matters
- 3 Step-by-Step Framework for Evaluating Alternative Investments
- 4 Common Red Flags in Alternative Investments
- 5 Evaluating Platforms and Sources
- 6 Tools for Evaluating Alternative Investments
- 7 FAQs about Evaluating Alternative Investments
- 7.1 How do I know if an alternative investment is legit?
- 7.2 What is a good return for an alternative investment?
- 7.3 What are the most common fees in alternatives?
- 7.4 Are alternative investments safe?
- 7.5 Can I invest in alternatives through my IRA?
- 7.6 How do I find reputable alternative investments?
- 7.7 What’s the minimum investment required?
- 7.8 What is a PPM?
- 7.9 Can alternative investments improve diversification?
- 7.10 How do I compare alternative investments?
- 7.11 What if I need to sell early?
- 7.12 Are crypto assets considered alternative investments?
- 8 Conclusion: Do Your Homework Before You Commit
What Are Alternative Investments?
Alternative investments are assets outside the traditional stock/bond/cash triangle. They include:
- Real estate (direct or syndicated)
- Private equity and venture capital
- Hedge funds
- Commodities and precious metals
- Cryptocurrencies and NFTs
- Peer-to-peer lending
- Art, collectibles, wine, and antiques
- Private credit and structured products
While these assets can enhance returns and reduce portfolio correlation, evaluating them requires deeper analysis than traditional securities.
Why Evaluation Matters
Unlike stocks or mutual funds:
- Alternatives are less transparent
- Pricing and performance are harder to benchmark
- Returns are often illiquid and long-term
- Regulatory oversight is limited
- Marketing materials may be overly optimistic
Proper evaluation protects you from fraud, overvaluation, unrealistic returns, and unsuitable investments.
Step-by-Step Framework for Evaluating Alternative Investments
Let’s break down the process into seven structured steps.
1. Understand the Asset Class
Start with a macro view. Before diving into a specific deal, understand:
- What the asset class is (e.g., private credit vs. real estate)
- Its historical performance (returns, volatility, cycles)
- Common risks and legal structures
- Liquidity profile
- Tax treatment and reporting burden
Example:
Investing in a real estate debt fund is vastly different from buying a crypto token or a startup equity share.
Tip: Read whitepapers, market reports (Preqin, PitchBook), and asset class primers from reputable institutions like J.P. Morgan, Fidelity, or Blackstone.
2. Analyze the Investment Structure
Common Structures:
- LLC or LP interests
- REITs (public or private)
- Special Purpose Vehicles (SPVs)
- Digital tokens or blockchain-based smart contracts
Key Questions:
- Who is the issuer or sponsor?
- Are you a limited partner, noteholder, or equity owner?
- What are your rights, voting power, and exit options?
- What fees are involved? (Management, performance, admin)
Watch out for opaque structures that make it difficult to trace ownership or value.
3. Evaluate the Sponsor or Manager
In alternative investments, people matter as much as the asset.
Research Points:
- Track record and experience
- Assets under management (AUM)
- Regulatory standing (e.g., SEC-registered?)
- Lawsuits, bankruptcy filings, or SEC actions
- Alignment of interests (Are they investing alongside you?)
Sources to check:
- LinkedIn, FINRA BrokerCheck, SEC IAPD
- Google News and court databases
- Prior fund performance summaries
Red Flag: A sponsor that won’t disclose their track record or financial stake in the deal.
4. Perform Asset-Level Due Diligence
Evaluate the actual asset being offered—be it real estate, a startup, or a tokenized investment.
Questions to Ask:
- How is the asset valued? (Third-party appraisal? Internal estimate?)
- What’s the business model?
- Who are the counterparties or tenants?
- What’s the exit strategy?
- How is the asset secured or insured?
For real estate:
- Analyze location, cap rate, occupancy, comps
- Review loan terms if debt-financed
- Check zoning, environmental risks, local economic trends
For startups:
- Understand burn rate, runway, founder experience
- Product-market fit and competitive moat
- Funding history and valuation reasonableness
For crypto or tokenized assets:
- Review whitepaper and tokenomics
- Assess community size and activity
- Check smart contract audits and chain security
Assess the Risk-Return Profile
Not all alternative investments are high-risk, but they often come with asymmetric outcomes.
Key Metrics:
- Projected IRR or ROI
- Cash-on-cash yield
- Time horizon (liquidity lockups, vesting)
- Capital call schedule
- Downside protection (collateral, guarantees, preferred returns)
Use stress testing:
Ask how returns hold up under conservative scenarios (e.g., 20% drop in real estate prices, delayed exit, lower interest income).
Consider correlation:
How will this asset perform during a recession or interest rate spike?
6. Understand Fees and Liquidity
Fee Types:
- Upfront fees (load fees, origination)
- Ongoing fees (management, admin, custodial)
- Performance-based fees (carried interest, profit splits)
Even great returns can be eaten up by high fees.
Liquidity Considerations:
- Lock-up period (e.g., 5-10 years for private equity)
- Redemption terms (monthly, quarterly)
- Early exit penalties
Tip: Always ask: “What’s my worst-case path to liquidity?”
7. Legal, Regulatory, and Tax Review
Legal:
- Is the offering SEC-compliant (Reg D, Reg A+, etc.)?
- Are offering documents (PPM, subscription agreement) available?
- Do you have a right to audit or receive financial updates?
Regulatory:
- Are there KYC/AML requirements?
- Is the manager registered with the SEC or state?
Tax:
- Will you receive a K-1 or 1099?
- Does the asset generate UBTI (if held in an IRA)?
- Is foreign investment or FATCA reporting involved?
Tip: Hire a CPA familiar with alternative investments before committing funds.
Common Red Flags in Alternative Investments
Promises of “guaranteed” high returns
No audited financials or track record
Excessive reliance on leverage
Overly complex legal or token structures
Pressure to invest quickly or sign NDAs
Lack of transparency in performance reporting
When in doubt, walk away.
Evaluating Platforms and Sources
Where you find your alternative investment matters. Evaluate:
| Source | What to Consider |
|---|---|
| Crowdfunding Platforms (e.g., Fundrise, Yieldstreet) | Regulation, vetting process, disclosures |
| Private Placement Memorandums | Sponsor credibility, minimum investment |
| Crypto Launchpads | Smart contract security, scam risk |
| Art/Collectible Marketplaces | Provenance, authenticity, insurance options |
Tools for Evaluating Alternative Investments
- SEC EDGAR Database – for filings and regulatory info
- Crunchbase – for startup data
- Preqin/PitchBook – for fund and private market analytics
- CoStar/LoopNet – for real estate comps
- Etherscan/Dune – for blockchain-based project data
- Morningstar Alternatives Screener – for comparative metrics
FAQs about Evaluating Alternative Investments
How do I know if an alternative investment is legit?
Check for regulatory filings, ask for audited financials, research the sponsor, and consult with a lawyer or advisor before investing.
What is a good return for an alternative investment?
This varies by asset. 8–12% IRR is reasonable for real estate. 20%+ may be expected in venture capital but with much higher risk.
What are the most common fees in alternatives?
Management fees (1–2%), performance fees (20% carry), setup/admin fees. Always read the fine print.
Are alternative investments safe?
They carry higher risk due to illiquidity, lack of oversight, and valuation challenges, but can be suitable if evaluated carefully.
Can I invest in alternatives through my IRA?
Yes, via Self-Directed IRAs, but be aware of UBTI, custodian rules, and prohibited transactions.
How do I find reputable alternative investments?
Look for platforms with SEC registration, detailed disclosures, and strong due diligence processes. Ask for third-party audits.
What’s the minimum investment required?
Private placements may start at $25,000–$100,000, while crowdfunding platforms may offer $500–$5,000 minimums.
What is a PPM?
A Private Placement Memorandum outlines risks, structure, use of proceeds, and investor rights in a private offering.
Can alternative investments improve diversification?
Yes, many are non-correlated to traditional markets, offering portfolio stability.
How do I compare alternative investments?
Use consistent metrics: IRR, fees, holding period, risk profile, tax impact, and liquidity terms.
What if I need to sell early?
Many alternatives are illiquid, and early exit options are limited or involve penalties. Always ask before investing.
Are crypto assets considered alternative investments?
Yes. Cryptocurrencies, NFTs, and DeFi tokens are increasingly part of the alternative asset category.
Conclusion: Do Your Homework Before You Commit
Evaluating alternative investments isn’t about chasing the highest return. It’s about risk-adjusted analysis, understanding the structure, and ensuring the sponsor and asset are credible.
With careful research, third-party validation, and professional guidance, alternative investments can become a powerful part of your diversified portfolio.
Ahmad Faishal is now a full-time writer and former Analyst of BPD DIY Bank. He’s Risk Management Certified. Specializing in writing about financial literacy, Faishal acknowledges the need for a world filled with education and understanding of various financial areas including topics related to managing personal finance, money and investing and considers investoguru as the best place for his knowledge and experience to come together.