Review net-of-fee returns rather than gross returns, and compare to relevant benchmarks and vintage year peers Request audited financials and verify performance claims with the fund administrator independently Understand how returns are calculated, as IRR, MOIC, and TWR can tell very different stories Be aware of survivorship bias in reported industry averages, which may overstate typical performance

Operational Due Diligence

Verify the fund uses an independent fund administrator rather than self-administering Confirm the fund is audited by a reputable independent auditor such as a Big 4 or well-known firm Review custody arrangements, compliance infrastructure, and regulatory registration history Conduct background checks on principals and review any disciplinary or legal history

Review the Private Placement Memorandum and Limited Partnership Agreement thoroughly before investing Understand tax treatment including K-1 complexity, UBTI exposure, and potential state filing requirements ERISA considerations apply if investing through retirement accounts and may limit eligible funds Side letter provisions and most favored nation clauses may affect your terms relative to other investors

Returns that are unusually consistent period after period may indicate valuation manipulation Reluctance to provide investor references, audited statements, or transparent reporting is concerning Excessive related-party transactions or a GP investing minimal personal capital alongside LPs warrant scrutiny High employee turnover, key person departures, or pressure to invest quickly without time for diligence are warning signs

Alternative Investment Due Diligence

Curated by: Rubric Advisors

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Manager Track Record

Review net-of-fee returns rather than gross returns, and compare to relevant benchmarks and vintage year peers
Request audited financials and verify performance claims with the fund administrator independently
Understand how returns are calculated, as IRR, MOIC, and TWR can tell very different stories
Be aware of survivorship bias in reported industry averages, which may overstate typical performance

Fee Structure Analysis

Management fees typically range from 1.5% to 2% of committed capital, charged regardless of performance
Carried interest or performance fees are typically 20% of profits above a hurdle rate
Watch for hidden fees such as transaction, monitoring, and portfolio company fees that add to total cost
Total cost drag over the life of a fund can reach 5% to 7% annually when all fees are included

Fund Terms & Liquidity

Capital call schedules and commitment periods typically span 3 to 5 years for private equity funds
Fund life is generally 7 to 10 years with extension provisions, meaning capital may be locked up for a decade
Distribution waterfall structures (European vs. American) determine how and when profits are returned
Key person provisions and GP removal rights provide important investor protections worth reviewing

Strategy & Portfolio Fit

Evaluate whether the strategy fills a genuine gap in your existing portfolio allocation
Consider the correlation with existing holdings and whether the fund truly adds diversification
Compare risk-adjusted return assumptions against available public market alternatives
Typical alternative allocations range from 5% to 20% of a portfolio, with vintage year diversification for PE and VC

Legal & Tax Review

Review the Private Placement Memorandum and Limited Partnership Agreement thoroughly before investing
Understand tax treatment including K-1 complexity, UBTI exposure, and potential state filing requirements
ERISA considerations apply if investing through retirement accounts and may limit eligible funds
Side letter provisions and most favored nation clauses may affect your terms relative to other investors

Red Flags

Returns that are unusually consistent period after period may indicate valuation manipulation
Reluctance to provide investor references, audited statements, or transparent reporting is concerning
Excessive related-party transactions or a GP investing minimal personal capital alongside LPs warrant scrutiny
High employee turnover, key person departures, or pressure to invest quickly without time for diligence are warning signs

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Red Flags

Related Topics

Primer on Private Equity

Investing in Venture Capital

Hedge Fund Strategies: An Investor's Guide

Manager Track Record

Fee Structure Analysis

Fund Terms & Liquidity

Operational Due Diligence

Strategy & Portfolio Fit

Legal & Tax Review

Red Flags

Related Topics

Primer on Private Equity

Investing in Venture Capital

Hedge Fund Strategies: An Investor's Guide