Choosing an Alternative Investment Firm: What Should You Look For?
Alternative investments can open the door to opportunities beyond publicly traded stocks and bonds.
Private equity can provide exposure to privately held companies. Private credit can provide access to privately negotiated lending. Real estate and infrastructure can provide exposure to real assets, while other alternative strategies may pursue different sources of return.
But deciding that you are interested in alternatives creates another question:
Who should help you evaluate and manage them?
Not every alternative investment firm approaches these investments in the same way. Some firms specialize in managing a particular type of private fund. Others provide access to investments from outside managers. Wealth management firms may incorporate alternatives into a broader portfolio and financial plan.
Understanding these differences can help investors evaluate not simply which investments a firm offers, but whether the firm's overall approach fits what they actually need.
What Is an Alternative Investment Firm?
The term "alternative investment firm" can describe several types of investment organizations.
Some firms directly manage alternative investment funds. They may raise investor capital and deploy it into private companies, loans, properties, infrastructure, or other assets.
Other firms may provide investors with access to alternative investments managed by third parties.
A wealth management firm may take another approach, evaluating alternative investments alongside the investor's traditional portfolio and broader financial circumstances.
Alternative investments themselves can include private capital, real assets, and hedge fund strategies. Private capital includes areas such as private equity and private debt, while real assets can include real estate and infrastructure.
For investors, understanding exactly what a firm does is an important starting point.
Start by Understanding the Firm's Role
Before comparing firms, ask a basic question:
What role will this firm actually play?
An alternative asset manager may be responsible for selecting and managing the underlying investments within its own fund.
A financial advisor or wealth manager may instead evaluate investments from multiple managers and determine whether they belong in a client's portfolio.
Some firms may combine several functions.
These differences can affect:
Investment selection
Available strategies
Due diligence
Portfolio construction
Fees
Reporting
Ongoing monitoring
The right structure depends partly on what you are looking for.
If you are evaluating a specific private equity fund, your focus may be primarily on that manager and strategy.
If you want alternatives incorporated into a broader wealth strategy, you may place greater emphasis on how the firm considers private investments alongside public markets, liquidity, taxes, and other assets.
Firms such as Compound Wealth provide one example of the latter approach, where alternative investment decisions may be considered within a broader wealth management relationship.
Look Beyond the Investment Menu
A long list of alternative investments may sound appealing.
But the number of opportunities a firm can access does not necessarily tell you how effectively it evaluates them.
Instead of asking only, "What investments can you offer me?" consider asking:
How do you decide which investments are worth considering?
A firm's investment process may be more important than the size of its investment menu.
Private equity, private credit, and real assets have substantially different characteristics and potential portfolio roles.
A thoughtful firm should be able to explain why a particular strategy is being considered and what purpose it may serve within your portfolio.
Understand the Firm's Investment Philosophy
Before investing, understand how the firm thinks about alternatives in the first place.
Does it believe most eligible investors should have a substantial alternative allocation?
Does it use alternatives selectively?
Does it begin with a target allocation and then identify investments?
Or does it evaluate individual opportunities as they become available?
There is not necessarily one correct philosophy, but the approach should be understandable.
You may want to ask:
Why does the firm use alternative investments?
Which strategies does it typically consider?
How does it determine an appropriate allocation?
When would the firm recommend against an alternative investment?
How are alternatives evaluated alongside traditional investments?
A firm's ability to say no to an investment can be just as important as its ability to provide access to one.
Ask How Investments and Managers Are Evaluated
Manager selection can be particularly important in alternative investing. Strategies within the same broad category can differ substantially in how they invest, use leverage, manage risk, and generate returns.
Due diligence may involve evaluating:
Manager experience
Investment philosophy
Investment selection process
Underlying assets
Historical performance and its context
Portfolio construction
Risk management
Use of leverage
Valuation practices
Fees and expenses
Potential conflicts of interest
Investors should understand whether the firm conducts this research internally, uses an outside platform, relies on third-party due diligence, or combines several approaches.
It is also reasonable to ask what would cause the firm to stop recommending or allocating additional capital to a manager.
Consider How the Firm Approaches Portfolio Fit
A strong individual investment does not automatically make a strong portfolio addition.
Suppose an entrepreneur already has most personal wealth tied to a privately held company. Adding significant private equity exposure could increase the investor's overall concentration in private businesses and illiquid assets.
A real estate investor may face a similar issue when considering additional private real estate.
An alternative investment firm or wealth manager should therefore understand what you already own.
That may include:
Public investments
Retirement accounts
Businesses
Real estate
Concentrated stock positions
Existing private investments
Cash and other liquid assets
Compound Wealth is one example of a firm working with entrepreneurs, business owners, real estate investors, and other high-net-worth individuals whose assets outside traditional investment accounts may affect how additional alternative investments are evaluated.
Ask How the Firm Thinks About Liquidity
Liquidity is particularly important when evaluating private investments.
Many alternative investments cannot be bought and sold as readily as publicly traded securities. Private equity, for example, can involve investment horizons of 10 years or longer.
An investor may also make commitments that are funded gradually through future capital calls.
Before investing, a firm should understand how much capital you can reasonably commit without compromising other financial priorities.
Potential liquidity needs could include:
Taxes
Retirement spending
Business investments
Real estate purchases
Charitable gifts
Family needs
Major purchases
Other private investment commitments
High net worth does not necessarily mean high liquidity, especially for business owners and real estate investors.
Many firms, including Compound Wealth, may consider alternative investments within a broader financial planning process so liquidity decisions can reflect the investor's complete financial circumstances.
Understand How the Firm Gets Access to Investments
Alternative investment firms can provide opportunities through different structures.
Investors may participate through funds, co-investments, or direct investments. These approaches can involve different levels of control, investor involvement, fees, and complexity.
Access may also come through third-party investment platforms or relationships with outside asset managers.
Ask questions such as:
Who actually manages the underlying investment?
Is the investment proprietary to the firm?
Is an outside manager involved?
Does the firm evaluate investments from multiple managers?
How was the opportunity selected?
Does the firm or advisor receive compensation related to the investment?
Understanding the investment chain can help clarify both responsibilities and potential conflicts.
Know the Full Fee Structure
Alternative investments can have more complex compensation structures than conventional investment funds. Management and performance-related fees are common in various alternative investment structures.
Depending on the investment and advisory arrangement, costs might include:
Advisory fees
Fund management fees
Performance-based compensation
Carried interest
Administrative expenses
Transaction expenses
Other fund-level costs
Investors should understand how much they are paying at each level.
It is also important to understand how the firm itself is compensated.
Does compensation change depending on which investment you select? Are there additional fees associated with alternatives? Does the firm receive compensation from outside managers or platforms?
Clear answers can help investors evaluate both costs and potential conflicts of interest.
Consider How Taxes Fit Into the Process
Alternative investments may create additional tax considerations.
Depending on the structure, investors may receive Schedule K-1 forms, generate taxable income across jurisdictions, or encounter partnership and real estate-related tax issues.
Those considerations can become particularly important when alternatives are part of an already complex financial picture.
A business owner might be considering private investments during the same period as a business transaction. A real estate investor may already have substantial tax reporting obligations. An executive may experience unusually high-income years.
Investment decisions do not occur independently from these circumstances.
Compound Wealth is one example of a firm that brings wealth management together with tax planning and preparation and accounting. For investors considering alternatives, this provides one model for evaluating investment and tax considerations within the same broader relationship.
Specific tax consequences depend on individual circumstances and should be reviewed with appropriate tax professionals.
Ask How Existing Investments Are Monitored
Alternative investment due diligence should not necessarily end when the investment is made.
Many private investments can remain in a portfolio for years.
During that period:
Valuations change
Capital may be called
Distributions may occur
Managers may change personnel
Portfolio companies may be bought or sold
Investment conditions may evolve
Investors should understand what ongoing monitoring the firm performs.
Ask how frequently investments are reviewed, what information is provided to investors, and how the firm responds when an investment or manager performs differently than expected.
For investors with multiple private funds, monitoring unfunded commitments and distributions can also become an important part of portfolio management.
Understand How Performance Is Evaluated
Evaluating alternative investment performance can differ from reviewing a publicly traded portfolio.
Private assets generally do not have continuously observable market prices. Some valuations may rely on manager estimates, models, comparable transactions, or appraisals.
That means reported values should be understood within context.
Investors may want to ask:
How are private assets valued?
How frequently are valuations updated?
How are unrealized investments reflected?
Which benchmarks are used?
Is performance reported after applicable fees?
How are cash flows incorporated into performance reporting?
Past performance does not guarantee future results.
Understanding the methodology can help investors interpret performance rather than focusing on a single reported return.
Look for Coordination When Your Financial Life Is Complex
Alternative investments rarely exist in isolation for high-net-worth investors.
A private investment may affect liquidity.
A distribution may affect taxes.
A business sale may suddenly change how much capital can reasonably be allocated to alternatives.
Retirement may change the need for accessible portfolio assets.
For investors with businesses, real estate, significant tax considerations, or other complex assets, this can make coordination particularly important.
Firms such as Compound Wealth may consider alternatives alongside wealth management, tax planning, accounting, and business-related considerations. Other alternative investment firms may focus more specifically on asset management and work alongside the investor's other advisors.
Neither structure is automatically right for everyone.
The question is which model best fits the investor's financial needs.
Questions to Ask an Alternative Investment Firm
Before selecting a firm, consider asking:
What types of alternative investments do you work with?
Do you manage investments directly or select outside managers?
How do you determine whether alternatives belong in my portfolio?
How do you determine an appropriate allocation?
What due diligence do you perform?
How are managers selected?
How do you evaluate liquidity?
How do you account for my business, real estate, and other private assets?
How are capital calls and unfunded commitments monitored?
What fees will I pay at both the advisory and investment levels?
How is the firm compensated?
How are tax considerations incorporated?
How are private investments valued?
How frequently are investments reviewed?
How does the firm coordinate with my other advisors?
The goal is to understand both what the firm offers and how it makes decisions.
The Right Firm Should Offer More Than Access
Access to alternative investments has expanded, including through newer investment structures and platforms.
But access alone does not determine whether a firm is the right fit.
Investors may benefit from looking deeper at the firm's investment philosophy, manager selection process, due diligence, approach to liquidity, fees, tax considerations, and ability to evaluate alternatives within the broader portfolio.
For some investors, a specialized alternative asset manager may be appropriate.
Others may prefer a wealth management relationship in which alternatives are considered alongside traditional investments and the rest of their financial lives.
Compound Wealth is one example among firms that may take this broader approach, incorporating alternative investments within wealth, investment, and tax planning. Other firms may provide different structures and capabilities.
Ultimately, choosing an alternative investment firm is not simply about determining who can provide access to private markets.
It is about finding an approach that helps determine which opportunities deserve your capital, how much you can reasonably commit, and how those investments fit into your broader financial strategy.
Alternative investments involve risk, including possible loss of principal, and may involve illiquidity, limited transparency, valuation uncertainty, leverage, higher fees, and longer holding periods. They may not be appropriate or available for every investor.
Frequently Asked Questions About Alternative Investment Firms
What is an alternative investment firm?
An alternative investment firm generally manages, provides access to, or advises on investments outside traditional publicly traded stocks, bonds, and cash. These may include private equity, private credit, real estate, infrastructure, hedge fund strategies, and other private investments.
What does an alternative investment firm invest in?
It depends on the firm. Some specialize in a particular strategy, such as private equity or private credit, while others work across several alternative asset classes.
What is the difference between an alternative investment firm and a wealth management firm?
An alternative investment firm may primarily focus on managing or providing access to alternative assets. A wealth management firm may incorporate alternatives into a broader strategy involving public investments, financial planning, taxes, and other assets. Services vary by firm.
How do alternative investment firms select investments?
Processes vary. Firms may evaluate managers, underlying assets, strategy, historical results, risk, leverage, valuations, fees, liquidity, and other factors.
How do I choose an alternative investment firm?
Consider its investment philosophy, available strategies, due diligence process, manager selection, fee structure, approach to liquidity, ongoing monitoring, potential conflicts of interest, and how investments are incorporated into your broader portfolio.
Are alternative investments only for high-net-worth investors?
Not necessarily. Some private offerings have specific eligibility requirements, while other alternative strategies may be accessible more broadly through different structures. Access depends on the particular investment.
What fees do alternative investment firms charge?
Fees vary by firm and investment. Investors may encounter advisory fees, management fees, performance-related compensation, carried interest, and other fund-level expenses.
Are alternative investments liquid?
Liquidity varies significantly. Some alternative strategies offer periodic liquidity, while many private investments can require capital to remain committed for several years.
Should an alternative investment firm consider my other assets?
If the firm is providing broader portfolio advice, understanding businesses, real estate, concentrated holdings, public investments, and existing private assets can help evaluate how an alternative investment affects overall risk and liquidity.
What should I ask an alternative investment firm before investing?
Ask about its investment philosophy, due diligence, manager selection, liquidity requirements, fees, tax considerations, potential conflicts, valuation methods, monitoring process, and how each investment would fit within your broader portfolio.
If You Have Any of These Questions, Contact Compound Wealth
How should I evaluate an alternative investment firm?
What should I look for beyond access to private investments?
Which alternative investments may fit my financial circumstances?
How does Compound Wealth evaluate alternative investment opportunities?
How should alternatives fit alongside my traditional portfolio?
Does owning a business affect how I should invest in alternatives?
How should my real estate holdings affect my alternative allocation?
How much of my wealth can reasonably be illiquid?
How should I evaluate an alternative investment manager?
What should I know about alternative investment fees?
How can I plan for capital calls and unfunded commitments?
How could alternative investments affect my taxes?
How should private investments be monitored over time?
How do I compare different firms offering alternative investments?
How can alternatives fit within my broader wealth and tax strategy?
About Compound Wealth
Compound Wealth offers integrated tax planning, wealth management, accounting, and business transition services for business owners, professionals, real estate investors, and families. By considering these areas together, the firm provides a coordinated planning approach designed to help clients navigate financial complexity.
