Due diligence questions on alternative investments
Due diligence is critical, crucial and never ending. When it comes to evaluating an alternative investment your own research to understand how the risks affect you is paramount. This is a list of questions to start you off in your investigations.
First Questions
- Is this investment too good to be true?
- Do the promised returns, justify the additional risks?
- Why am I here? What is wrong with traditional (stock/bond market) investments at this time?
- Does the business model make sense?
- What proof do you have that the implementation of the business model will be done correctly?
Jurisdiction Analysis
- Does the jurisdiction have a long history of protecting property rights?
- What is the probability of taxes increases in this jurisdiction?
- How stable is the currency now, and at the end of the investment period?
- Does the jurisdiction have a company’s register?
- Is this country safe, stable and non-controversial?
- How accessible is the country in which the alternative investment is located? (How hard is it to get there?)
- How strong are there KMC / AML procedures? The stronger the better. You do not want your good money to be mixed with any bad money.
Information
- Is their balance sheet and other financial information available?
- Are their auditor reports available?
- Who is their auditor?
- Is the board of directors public?
- Do they have an about us page with pictures of employees?
- What does the internet say about the person and the investment being considered?
- Is there a trustee? and how trustworthy is the trustee.? What documentation will their be to confirm the legal responsibility of the trustee?
- Is the firm registered with any industry associations?
- Is everybody flocking to these investments? (Warren Buffet : “be greedy when others are fearful and be fearful when others are greedy”)
History
- How long have they been operating?
- How have they been funded?
- Who has funded them?
- What is the history of the people involved?
- Type of investments: Some industries, unfortunately, are rife with unscrupulous people.
- How long has this investment model existed? Has it been tested in major financial crashes?
Legal
- Does the company emphasise arbitration over legal recourse?
- Are certain parts of the contract open interpretation?
- Are the contracts one-sided to start with?
- How easy is it for you to take legal action?
- What is legal protection available?
- How long is the typical court case in the country of legal recourse?
- Is there a financial ombudsman in this jurisdiction?
- How is this investment type regulated?
- Are there restrictions in your home country on which international investments you can invest in?
Tax Implications
- Are you fully aware of the tax implications? How is the income declared?
- Will you need accountants in both your home country and in the investment jurisdiction?
- Who will manage and pay for filing the tax returns in the investment jurisdiction?
- Is there a double taxation treaty between your tax domicile and the investment jurisdiction?
Relationship
- Do they have any non-disclosure restrictions in their contracts? Meaning do they ask you not to speak about the performance of this investment to others? (Indeed they do exist)
- How much “skin in the game” does the investment company have in the alternative investment?
Your financial situation
- What percentage of your assets are you investing in this alternative investment?
- Have you lost money on similar investments in the past?
- Have you discussed this investment with others?
Is your decision rational or emotional
- What assumptions are you making about this investment?
- Have you reflected on this investment proposal for more one week?
- Do the investment promoters use emotional hooks such as greed or fear or being left out?
- How hard are they trying to sell?
- Does the company create deadlines to invest? Or do they create the impression of scarcity?
Examples of alternative Investments gone very wrong
