The Due Diligence Checklist: 15 Questions Before Any Alternative Investment
Alternative investments can be useful tools.
They can also be expensive distractions.
For high earners and business owners, the real risk usually isn’t “alternatives are bad.” It’s that people buy them for the wrong reason (FOMO, a persuasive pitch, a tax headline), without a clear role in the portfolio.
So here’s a simple, repeatable framework: 15 questions to ask before you invest in any alternative—private equity, private credit, hedge funds, real estate syndications, interval funds, structured notes, venture, and “private” versions of anything.
This isn’t about being cynical.
It’s about being deliberate.
Start with the job: what is this investment supposed to do?
Before manager selection, before fees, before tax talk—define the job.
If you can’t answer this in one sentence, you’re not doing due diligence yet.
Is this meant to reduce volatility?
Increase return potential?
Provide income?
Hedge inflation?
Add diversification (true diversification, not a different label)?
Solve a tax problem?
If the job is unclear, the investment will be judged emotionally later.
The 15-question due diligence checklist
1) What’s the simple-English strategy?
If you can’t explain how it makes money in plain language, you don’t understand the risk.
Ask:
What’s the return driver (carry, spread, volatility, illiquidity, leverage, operational improvement)?
What has to be true for this to work?
2) What are the real risks (not the marketing risks)?
Every deck lists risks. Your job is to identify the ones that matter.
Ask:
Where can this break?
What’s the “left tail” scenario?
3) What’s the liquidity, really?
“Quarterly liquidity” and “monthly windows” are not the same as “I can get my money when I want.”
Ask:
When can I redeem?
Are there gates, suspensions, lockups, or notice periods?
What happens in stressed markets?
4) What’s the time horizon and capital call profile?
Especially for private equity and real estate.
Ask:
When is capital called?
When do distributions typically start?
What’s the expected hold period?
5) How is this valued?
Illiquid assets are often valued by models and appraisals, not by a live market.
Ask:
Who marks the book?
How often?
What assumptions drive valuation?
6) What are the fees, all-in?
The fee schedule is rarely the full fee reality.
Ask:
Management fees, incentive fees/carry, fund expenses
Transaction fees, monitoring fees, admin fees
Any fee offsets?
Then ask the most important question:
What do I have to believe for these fees to be worth it?
7) What’s the track record—and what’s the context?
A good track record can still be the wrong strategy for you.
Ask:
What period does it cover?
What market regime did it benefit from?
What’s the dispersion of outcomes (best vs worst deals)?
8) What’s the downside experience?
Most managers can explain upside.
Few can explain drawdowns with clarity.
Ask:
What happened in 2008, 2020, 2022 (or the closest analog)?
What did you learn and change?
9) What’s the manager’s edge?
“Relationships” and “proprietary deal flow” are claims. You want evidence.
Ask:
Why do you win deals?
Why do you get paid (skill) vs paid (market beta)?
10) How aligned is the manager?
Alignment isn’t a slogan. It’s structure.
Ask:
How much personal capital is invested?
Are they investing alongside you in the same share class?
Are incentives tied to long-term outcomes or short-term AUM growth?
11) What’s the concentration inside the fund?
A fund can look diversified and still be concentrated.
Ask:
Top 10 positions exposure
Sector/geography concentration
Single borrower/sponsor concentration (private credit)
12) What’s the leverage?
Leverage can be explicit or hidden.
Ask:
Is leverage used at the asset level, fund level, or both?
What covenants exist?
What happens if financing dries up?
13) What are the tax realities?
Tax benefits are often real—but rarely free.
Ask:
What forms will I receive (K-1, 1099)?
Timing of K-1s (and extension risk)
UBTI/UBTI blockers for retirement accounts
State filing complexity
14) What’s the operational and compliance setup?
This is the unsexy part that prevents avoidable disasters.
Ask:
Who is the administrator?
Who is the auditor?
Who is the custodian (if applicable)?
Any regulatory issues, litigation, or key-person risk?
15) How does this fit with my overall plan—and what’s the exit plan?
This is the question that turns due diligence into portfolio design.
Ask:
What percentage of my investable assets is appropriate?
What would make me add, reduce, or exit?
What’s my “I was wrong” signal?
A simple scoring method (so you don’t get seduced by one feature)
If you want to make this practical, score each category 1–5:
Strategy clarity
Liquidity terms
Fees (all-in)
Track record + context
Downside experience
Alignment
Operational quality
Portfolio fit
You’re not trying to create false precision.
You’re trying to avoid the classic mistake: overweighting one shiny benefit (taxes, yield, access) and underweighting the total risk package.
Bottom line
Alternatives can earn their keep.
But they should be purchased like you’re buying a business: clear job, clear risks, clear terms, clear alignment, clear fit.
If you want a second opinion, we can pressure-test an alternative investment together—translate the strategy into plain English, map the real risks, model liquidity, and decide whether it deserves a place in your portfolio.
