SEC red flag over advisers due diligence for alternative funds

US market regulator SEC has raised concerns about certain shortcomings of advisers while providing advice to clients on putting their money into alternative investment funds.
The risk alert comes after the watchdog found instances of advisers even providing "potentially misleading information in marketing materials about the scope and depth of due diligence conducted".
In recent times, alternative investment funds such as hedge funds, private equity funds, or funds of private funds, have been attracting much interest from investors.
The Securities and Exchange Commission (SEC), in a statement on Tuesday, said that certain deficiencies have been found during the examination of several advisory firms.

Among them, entities were found to be omitting alternative investment due diligence policies and procedures from their annual reviews, even though such "investments comprised a large portion of certain advisers investments on behalf of clients".
Issued by the watchdog's Office of Compliance Inspections and Examinations (OCIE), the risk alert is related to the due diligence processes that investment advisers use when they place clients' assets in alternative investments.

OCIE Director Drew Bowden said money continues to flow into alternative investments.
"We thought it was important to assess advisers' due diligence processes and to promote compliance with existing legal requirements, including the duty to ensure that such investments or recommendations are consistent with client objectives," Bowden noted.

India also has alternative investment funds (AIFs) and have been created for for real estate, private equity and hedge funds.
In India, AIFs are divided into three categories. Category I AIFs include those investing in start-ups, social ventures, SMEs, infrastructure or other areas that can get government incentives for being 'socially or economically desirable'.
The Category II AIFs include private equity funds and debt funds which do not get any incentives or concessions from the government and do not undertake leverage or borrowing other than to meet day-today operational requirements.
The Category III include hedge funds or funds which trade with a view to make short-term returns.