Alternative investments are no longer a niche strategy; they’ve become a key piece of many diversified portfolios. Despite growing interest in “alts,” many investors overlook the critical questions that can make the difference between a good investment and a great one. By asking six important questions regarding liquidity, transparency, complexity, fees, operational and regulatory risks, and valuation, investors can gain insight into how alternatives can enhance their portfolios and long-term goals. 

#1 – What does limited liquidity really mean for my portfolio? 

Most investors are accustomed to daily liquidity in public markets, but alternatives often operate differently. Limited liquidity isn’t necessarily a drawback; it’s a design feature. By committing capital for longer periods, managers can pursue strategies that require time to mature, such as real estate repositioning, private credit lending, or private equity growth investments. Clients should ask how liquidity aligns with their time horizon, not just how fast they can exit. Longer investment periods often allow for higher return potential and reduced market volatility exposure. 

#2 – How transparent are alternative investments? 

Transparency in alts doesn’t always look the same as in traditional markets, but that doesn’t mean it’s lacking. While private investments may not have daily pricing, reputable sponsors provide detailed offering materials, regular reporting, and third-party audits. Investors should focus on understanding the quality of transparency: data integrity, reporting frequency, and sponsor communication, rather than expecting public-market-level information sharing . 

#3 – Is the complexity of alternatives a risk or an advantage? 

Alternative strategies often involve structures and mechanics that seem complex at first glance. Complexity isn’t a red flag; it’s a reflection of the specialized strategies that drive uncorrelated returns. The key is education and partnership with experienced managers who simplify the details and help clients understand how each component works. Ask what makes this investment complex and why? Often, complexity serves to capture value unavailable in simpler, traditional approaches. 

#4 – Why do alternatives often have higher fees, and when are they worth it? 

Fees in alternatives can sometimes appear higher than those in traditional funds, but they often reflect the active management, sourcing, and operational oversight these investments require. When structured thoughtfully, fees should be viewed in the context of the value they provide, rewarding performance, aligning interests, and supporting long-term outcomes. Clients should look beyond headline numbers and ask how fees are earned and how they incentivize the manager’s success to mirror their own objectives. 

#5 – How do I know if an alternative investment firm is well-governed? 

Alternatives operate in a more nuanced regulatory environment, which underscores the importance of due diligence and experienced management. The best firms view compliance, governance, and operational rigor as competitive advantages, not obligations. Rather than fearing regulatory complexity, clients should evaluate a sponsor’s internal controls, third-party oversight, and transparency around operations. 

#6 – If alternatives aren’t priced daily, how can I trust their value? 

Unlike publicly traded assets, many alternatives are valued periodically rather than daily. This deliberate valuation cycle can actually help investors stay focused on long-term fundamentals rather than short-term price noise. Reliable valuation methods: third-party appraisals, independent audits, and consistent methodologies, are key. Ask how valuations are determined and reviewed. A well-defined, transparent valuation process fosters confidence in both the manager and the investment itself. 

Alternatives Provide Opportunities 

Alternative investments can open doors to opportunities beyond traditional markets, offering diversification, potential for uncorrelated returns, and long-term growth. Asking the right questions helps investors make informed decisions and unlock the full potential of these strategies. As a leading alternative investment firm, NexPoint is committed to guiding financial advisors through this space with expertise and clarity. We look forward to the opportunity to explore how alternative investments can strengthen your clients’ portfolios and help them achieve their financial goals.