How to Evaluate Alternative Investments as an Accredited Investor


An accredited investor can invest in exclusive alternative investments. They range from hedge funds, venture capital firms, and real estate to private equity funds. But, many accredited investors devote far too little effort to evaluating how well these alternative investments are performing. How can you evaluate?

Evaluating investments is a technique to see whether an accredited investor needs to change the mix of alternative investment assets he is using. These evaluations differ depending on the asset type. Evaluations will give insights into the performance and value of the alternative investment asset.

Alternative investments do not have the same available measures. However, each includes different metrics and key performance indicators that may get used to evaluate its effectiveness.

Here are six indicators that accredited investors can evaluate alternative investments.

Who are Accredited Investors?

A company or person that qualifies as an accredited investor can invest in non-SEC registered securities.  They have the option of investing directly in private equity, hedge funds, equity crowdfunding, and venture capital. The SEC determines who may and cannot be accredited investors and participate in these possibilities.

To know more about accredited investor qualifications and accredited investor requirements,

read more To Become An Accredited Investor, Here’s What You Need To Know.

What Are Alternative Investments?

When you hear the term "alternative investment," it most frequently refers to anything other than "Wall Street." It is a type of investment different from stocks, bonds, ETFs, and mutual funds. Alternative investments are not the same as traditional investments. Stocks, for example, can be evaluated based on pricing and value fluctuations. Furthermore, publicly traded corporations that issue shares must produce quarterly and yearly financial reports. Alternative investments can also apply to real estate, private debt, cryptocurrency, collectibles, and commodities. Mostly accredited investors can invest in all alternative investments. 

How can Accredited Investors Evaluate Alternative Investments?

  • Evaluation #1: Consider Liquidity.

Traditional assets, such as equities, offer one significant advantage: liquidity. These assets are traded on open marketplaces with millions of buyers and sellers. These investments are simple to enter and quit. 

Each alternative asset has its amount of liquidity. Cryptocurrencies, for example, have marketplaces and exchanges where liquidity is easy to come by and access is straightforward. Others, like private debt, are less liquid. These assets are far more difficult to sell or swap for the case without suffering potentially significant losses.

On the other hand, illiquid assets may sometimes reward an accredited investor with substantially higher profits.

An accredited investor should evaluate his own expected financial needs while analyzing alternative assets. The availability of cash should thus be considered when deciding whether to invest in such asset types. When investing in illiquid assets, you must be willing to retain your investments for an extended time.

  • Evaluation #2: Calculate the Internal Rate of Return.

For alternative investments like real estate and private equity, calculating the internal rate of return is a suitable metric. Both of those assets make investment decisions based on cash flow.

The internal rate of return calculates an investment's implied yearly rate of return. It starts with a $0 net present value investment and calculates how fast you will get a return.

The statistic prioritizes early return above other considerations such as overall return or market situation at the time. It is, nevertheless, a useful tool for comparing investments against your intended period for profits.

  • Evaluation #3: Examine an investment's underlying assets.

Grocery shops and art galleries are not the same. The fundamental assets of a gallery are the art pieces for sale. A grocery shop, which is normally a much bigger location, also has inventory - groceries - that sell rapidly and are frequently refilled.

Investments, like the museum and the grocery shop, approach assets differently. To be lucrative, the gallery just requires a modest number of items at a high price. Profits at grocery businesses are driven by a rapid turnover of goods.

Comprehending the underlying assets aids in understanding numerous fundamental investment concepts associated with these assets. The first is the type of returns and dangers that an investor will experience by owning the asset. The second consideration is whether the investment contributes to portfolio diversification.

Assets that generate and keep value in a variety of scenarios are less risky than those whose value swings dramatically. An accredited investor should also consider if the underlying assets adequately diversify a portfolio. Investing in art when one's portfolio contains a lot of art does not diversify. Rather, adopting a new and distinct asset, like real estate, helps to diversify assets.

  • Evaluation #4: Determine When You Will Be Paid

Payment arrangements for private loans and other alternative investments are often tailored. Some agreements, generally on a monthly or quarterly basis, pay interest before repaying the principal. Others pay down all interest payments when the debt matures.

An accredited investor should analyze the documents of the underlying investment allowing you to establish when and how often you will be paid.

  • Evaluation #5: Recognize the Overall Risk

Every investment involves some level of risk. Risk tolerance levels differ depending on each accredited investor and the asset type. Examining the pros and drawbacks to determine possible rewards and risks. Consider private loan default rates, real estate market history, and cryptocurrency price volatility.

Risk evaluations must frequently entail assessing how an asset will function under various future scenarios. Consider if the possible additional profit from a new investment will outweigh the regular and long-term dangers.

  • Evaluation #5: Understand the Ratios

Alternative investments such as hedge funds are popular. Benchmarking is frequently used in hedge fund analysis. Risks and returns are assessed against a set benchmark, such as the performance of a market. This benchmarking evaluates hedge funds and other alternative investments using conventional ratios. The following are the ratios an accredited investor must be aware of:

  1. Beta: It is a measure of the risk of an asset in comparison to market risk. The greater the Beta value, the more risky the asset.
  1. Alpha: It is the difference between the return on an asset or portfolio and the return on the benchmark about the risk (Beta). Alpha contextualizes your investment, considers risk, and compares results to benchmarks.
  1. Sharpe Ratio:  It calculates the percentage return on risk per unit of risk. It necessitates the rate of return on your asset as well as a risk-free asset. It also requires the standard deviation of the return rate on your asset. It assesses performance relative to risk in the same way that Alpha does, but it compares assets to each other rather than to a market benchmark.

Bottom Line

Accredited investors add alternative investments to their portfolios because they are an appealing addition. But, they should also recognize how to evaluate these alternative investments to result in improved investment choices and outcomes. Understand how to evaluate various investments and their advantages, then compare them to one another and other benchmarks. Your portfolio will be more robust, and your rewards will be maximized.

If you are an accredited investor considering investing in alternative investments like real estate, it is critical to engage with trustworthy and experienced alternative investment platforms, such as Assetmonk. We will walk you through the entire procedure and assist you in making educated selections. Assetmonk also offers exclusive, highly researched commercial and residential real estate possibilities to investors, making it easier to develop a broad and successful portfolio. 

Related Articles

  1. Systematic risk: What Investors Need to Know.
  2. The Pros and Cons of Alternative Investments: A Guide for US Investors.


Q1. How do you evaluate alternative investments?

A. The following are ways you can evaluate alternative investments

  • Evaluation #1: Consider Liquidity.
  • Evaluation #2: Calculate the Internal Rate of Return.
  • Evaluation #3: Examine an investment's underlying assets
  • Evaluation #4: Determine When You Will Be Paid
  • Evaluation #5: Recognize the Overall Risk
  • Evaluation #5: Understand the Ratios

Q2. What criteria does a firm use to rank alternative investments?

A. When looking at alternative investments, the essential features to analyze are correlation, fee structure, liquidity, minimum investment requirements, regulation, and returns.

Q3. What is the rule for an accredited investor?

A. The SEC characterizes an accredited investor as someone who fulfills one of the three criteria listed below: Income. He should have a yearly income of at least $200,000, or $300,000 when coupled with the income of a spouse. This amount should be maintained year after year.

Q4. What happens if you invest and are not an accredited investor?

A. Being a non-accredited investor does not exclude an individual from investing. But, investment options differ from those available to accredited investors. Certain forms of bonds, real estate, shares, and other instruments are available to non-accredited investors.

Q5.  How long does investor accreditation last?

A. According to SEC guidelines, your accreditation is applicable for 5 years as long as you self-certify that you are still an accredited investor.