Alternative Investment Due Diligence
Before committing capital to illiquid alternatives, sophisticated investors conduct rigorous due diligence across strategy, operations, legal structure, and risk factors. This resource provides institutional-quality frameworks, category-specific checklists, and expert guidance for evaluating private credit, real estate syndications, tokenized assets, and 15+ other alternative investment categories.
How to Use This Resource
Learn the Universal Framework
Start with the 7-part framework below to spot gaps in any alternative investment evaluation process.
Choose Your Asset Category
Jump into checklists tailored to private credit, real estate, tokenized assets, and 15+ other categories.
Download Tools & Templates
Use printable checklists, reference scripts, and legal request templates while you evaluate deals.
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Why Due Diligence Matters: The Cost of Skipping Steps
Industry studies suggest most alternative investment losses stem from inadequate due diligence rather than market factors†
Annual investor losses in alternative fund frauds, primarily in unregistered private placements with insufficient verification†
Time institutional investors spend on comprehensive manager due diligence—individual investors often spend under 2 weeks
Common Due Diligence Failures That Cost Investors Capital
- Manager misrepresentation: Inflated track records, fabricated credentials, or misleading performance data (caught through reference checks and independent verification)
- Fee structure opacity: Hidden costs, tiered carry structures, or catch-up provisions that can erode 40–60% of gross returns
- Operational deficiencies: Weak custody arrangements, inadequate insurance, or single points of failure in critical infrastructure
- Legal structure risks: Unfavorable jurisdiction selection, weak investor protections, or conflicts of interest favoring GP over LPs
† Sources: Cambridge Associates alternative investment research, SEC enforcement data, industry loss analysis
The Universal Alternative Investment Due Diligence Framework
While each alternative asset category requires specialized analysis, all rigorous due diligence processes evaluate these seven core dimensions. Use this framework as your starting checklist before diving into asset-specific considerations.
Investment Strategy & Track Record
Verify the manager's stated strategy matches historical execution and documented performance. Request audited track records covering full market cycles, including drawdown periods.
Critical Questions:
- What is the investment thesis and competitive edge in this market?
- How has the strategy performed during previous downturns (2008, 2020)?
- Are track records audited by Big 4 or reputable accounting firms?
- Can you speak with 3-5 existing investors for LP references?
- What percentage of AUM comes from institutional allocators?
Deliverable: One-page strategy summary with 10-year track record showing performance during market stress periods, plus verification of audited returns.
Fee Structure & Total Cost of Ownership
Calculate total fees including management, performance, administrative, and exit charges. Model how fees impact net returns across different performance scenarios.
Critical Questions:
- What is the all-in fee burden as percentage of gross returns?
- Are performance fees subject to hurdle rates (8%+ preferred)?
- Do performance fees include high-water marks or clawback provisions?
- Are there hidden costs (fund formation, legal, transaction fees)?
- How do total fees compare to category benchmarks?
Deliverable: Fee waterfall model showing net returns at 5%, 10%, and 15% gross IRR scenarios, with all-in cost comparison to category standards.
Liquidity Terms & Exit Options
Understand the true liquidity profile including lock-up periods, redemption windows, gates, and secondary market access. Never assume you can exit before stated terms expire.
Critical Questions:
- What is the initial lock-up period (1 year, 5 years, indefinite)?
- Are there redemption windows (quarterly, annual, at fund wind-down)?
- Can the GP gate redemptions? Under what circumstances?
- Does a secondary market exist? At what typical discount?
- What penalties or fees apply for early withdrawal if permitted?
Deliverable: Liquidity timeline showing earliest possible exit, redemption procedures, and secondary market assessment with historical discount ranges.
Legal Structure & Governance
Review formation documents with qualified counsel. Assess investor rights, conflict resolution mechanisms, and alignment of interests between GP and LPs.
Critical Questions:
- What is the legal structure (LP, LLC, offshore fund)?
- Which jurisdiction governs disputes? Why was it selected?
- What rights do LPs have (information access, GP removal)?
- Are conflicts of interest properly disclosed and managed?
- Has securities counsel reviewed PPM, LPA, and subscription documents?
Deliverable: Legal review memo from securities attorney highlighting key LP rights, conflicts, and negotiable terms in formation documents.
Operational Due Diligence
Assess the operational infrastructure supporting the investment including custody, insurance, reporting systems, and business continuity plans. Weak operations create risks independent of investment merit.
Critical Questions:
- Who serves as administrator, auditor, and custodian?
- Are assets held by qualified third-party custodian?
- What insurance coverage exists (E&O, crime, property)?
- How often do investors receive audited financials?
- What cybersecurity and business continuity protocols exist?
Deliverable: Operational assessment verifying third-party custody, insurance adequacy, and audit/reporting standards meet institutional requirements.
Manager & Team Evaluation
Conduct comprehensive background checks on key personnel. Verify credentials, check regulatory history, and assess team stability and depth.
Critical Questions:
- What are the professional backgrounds of key decision-makers?
- Any regulatory actions, litigation, or bankruptcies in history?
- How much personal capital have managers co-invested?
- What is team turnover rate? Are key person provisions included?
- Can you conduct on-site visits to observe operations directly?
Deliverable: Background check results, reference call notes from 3-5 LPs, and verification of manager co-investment amounts.
Risk Assessment & Stress Testing
Model downside scenarios and assess what could go wrong. Every investment has risks—the question is whether they're understood, disclosed, and appropriately compensated.
Critical Questions:
- What are the 3-5 primary risk factors for this investment?
- How would a 2008-style financial crisis impact the strategy?
- What is the maximum capital you could lose (total loss scenario)?
- Are there concentration risks (single asset, geography, tenant)?
- How much leverage is employed? What are covenant requirements?
Deliverable: Downside scenario analysis showing performance under market stress, concentration risk assessment, and maximum loss quantification.
Universal Red Flags: Walk Away Signals
Certain warning signs should prompt immediate reconsideration regardless of asset category. If you encounter multiple red flags from this list, walk away—no matter how attractive the projected returns appear.
Manager & Documentation Red Flags
- Pressure to invest quickly or "limited time" urgency tactics
- Incomplete or missing audited financial statements
- Manager unwilling to provide investor references
- Track record cannot be independently verified
- Regulatory actions, litigation, or criminal history
- Manager refuses on-site visits or operational transparency
Structure & Economics Red Flags
- Guaranteed returns or "no risk" promises (impossible in alternatives)
- Fee structures that extract >60% of gross returns
- Opaque or overly complex legal structures
- Manager lacks meaningful co-investment ("skin in the game")
- No third-party custody or asset verification
- Terms heavily favor GP with minimal LP protections
Tokenization & Digital Asset Red Flags
- Unclear legal claim over underlying assets—token does not map to enforceable interest
- Smart contracts lack independent security audits from reputable firms
- Custody through unknown or unregulated entities with no independent verification
- Undefined or misrepresented regulatory compliance status
Critical Reminder: If something feels "off" or too good to be true, trust your instincts. The most expensive mistakes in alternative investing come from ignoring warning signs because projected returns were attractive. No return justifies investing with managers who fail basic transparency and operational standards.
Category-Specific Due Diligence Frameworks
Each alternative asset category requires specialized evaluation beyond the universal framework. Select your investment category below to access detailed checklists, red flags, and category-specific best practices.
Highlighted categories (5 of 18+)
Private Credit & RBF
Evaluate creditworthiness, collateral quality, covenant structures, and default scenarios for direct lending and private debt investments.
Fractional Real Assets
Assess property underwriting, sponsor track record, capital structure, market fundamentals, and exit strategy for direct real estate investments.
Tokenized RWA
Verify smart contract audits, custody arrangements, regulatory compliance, and underlying asset verification for blockchain-based investments.
Litigation Finance
Analyze case merit, damages potential, counsel quality, non-recourse structure, and binary outcome scenarios for legal claim investments.
AI Infrastructure
Evaluate power capacity, cooling systems, tenant creditworthiness, technology obsolescence risk, and interconnection queue positioning.
View All Categories
Explore comprehensive due diligence frameworks for carbon markets, longevity biotech, music royalties, and 13+ other alternative asset classes.
Due Diligence Tools & Resources
Downloadable Checklists
Access printable PDF checklists for systematic evaluation across all alternative investment categories. Use these as your working documents during due diligence processes.
Weekly Due Diligence Insights
Get real-world case studies, fraud alerts, and expert analysis delivered to your inbox. Learn from institutional due diligence workflows and real investor outcomes.
Third-Party Due Diligence
For larger allocations, consider independent due diligence specialists experienced in private funds, alternative assets, and operational risk audits. We maintain a curated directory of qualified providers.
Note: We do not receive compensation from listed providers and do not endorse any specific firm.
Legal Document Templates
Access templates for LPAs, subscription agreements, information requests, key negotiation terms, and reference check questionnaires.
AltStreet's Role: AltStreet does not sell investments, provide individualized advice, or receive compensation from featured platforms or service providers. Our role is to provide independent research, educational frameworks, and tools to help investors conduct their own due diligence.
Frequently Asked Questions
What is alternative investment due diligence?
Due diligence is the systematic investigation of non-traditional assets before investing—covering manager track records, fee structures, liquidity terms, legal documents, operational infrastructure, and asset-specific risks across categories like private equity, real estate, and private credit.
How long should alternative investment due diligence take?
Institutional investors typically spend 3-6 months on comprehensive due diligence for new alternative investment managers, including on-site visits, reference checks, and operational reviews. Individual investments within existing relationships take 2-4 weeks. Never rush due diligence—illiquid investments with 5-10 year lockups demand thorough vetting.
What are the key components of a due diligence checklist?
Essential components: (1) strategy and track record, (2) fee structure analysis, (3) liquidity terms, (4) legal structure review, (5) operational infrastructure, (6) manager background checks, and (7) risk assessment with downside scenarios.
How do I adapt this framework to my specific asset class?
Start with the 7-part universal framework as your foundation, then layer in category-specific considerations. For example, private credit requires covenant analysis and LTV ratios; real estate demands property underwriting and market fundamentals; tokenized assets need smart contract audits and custody verification. Each category page provides tailored checklists building on the universal framework.
Should I hire third-party due diligence firms for alternative investments?
For allocations above $500K or complex strategies, engaging independent due diligence specialists often proves worthwhile. These firms conduct operational audits, verify track records, perform background checks, and assess legal structures with expertise beyond most individual investors. Fees typically range from $10K-$50K but can prevent losses from inadequate vetting.
What are the biggest due diligence mistakes investors make?
Common failures include: (1) Rushing evaluation due to FOMO or artificial urgency, (2) Failing to verify track records independently, (3) Not modeling total fees and their impact on net returns, (4) Skipping reference checks with existing investors, (5) Ignoring liquidity risks and assuming early exit options, (6) Not reviewing legal documents with qualified counsel, (7) Accepting manager representations without independent verification.
Start Your Due Diligence Journey
Explore our comprehensive guides, download category-specific checklists, and learn from institutional-quality frameworks. Protect your capital through rigorous evaluation before committing to alternative investments.
Educational Disclaimer: This due diligence resource is for educational purposes only and does not constitute investment, legal, or tax advice. Every investment situation is unique and requires evaluation by qualified professionals including securities attorneys, tax advisors, and financial planners with alternative investment expertise.
No Guarantees: Due diligence cannot eliminate all investment risks. Even thoroughly vetted investments can lose money due to market conditions, operational challenges, or unforeseen events. Past performance and comprehensive due diligence do not guarantee future results or prevent losses.
Platform & Service Provider Mentions: Platform mentions, case studies, service provider listings, and examples throughout this page and site are for illustrative and educational purposes only. They do not constitute endorsements, recommendations, or paid promotions. AltStreet does not receive compensation from featured platforms or service providers.
Investment Risks: Alternative investments carry substantial risks including illiquidity, loss of principal, limited transparency, complex fee structures, and dependence on manager skill. These checklists and frameworks provide starting points for evaluation but should not replace professional guidance tailored to your specific circumstances, risk tolerance, and investment objectives.