Alternative Investments for Accredited Investors: A Plain-English Guide

Alternative investments are assets and strategies outside traditional stocks, bonds and cash. Many are held through a private fund, which pools money from eligible investors and is run by a fund manager. Common categories include private equity, venture capital, private credit, real estate, infrastructure and hedge strategies.

In brief: private equity funds generally take ownership stakes in established private companies. Venture capital funds focus on early-stage companies. Private credit funds typically lend to businesses outside the traditional banking system. Real estate funds hold or finance property. Infrastructure funds focus on long-lived assets such as transportation, energy or utilities. Hedge funds use a range of trading approaches, which may include long and short positions.

Most private funds are offered under exemptions from SEC registration, often Rule 506(b) or Rule 506(c) of Regulation D. Under 506(b), the issuer may not use general solicitation. Under 506(c), general solicitation is allowed, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status. Offerings are made only by the issuer through its own offering documents, and nothing on this site is an offer or solicitation.

Historically, private funds have been open mainly to institutions and to individuals who meet the accredited-investor definition in SEC Rule 501(a). For individuals, the rule includes income above $200,000 (or $300,000 jointly with a spouse or spousal equivalent) in each of the prior two years with the same expected this year. It also includes net worth above $1 million, excluding the primary residence, alone or jointly with a spouse or spousal equivalent.

The August 2020 amendments widened the definition. Holders in good standing of the Series 7, Series 65 or Series 82 licenses can qualify. So can knowledgeable employees of certain private funds. Entities and family offices with over $5 million in investments or assets, as well as registered investment advisers and exempt reporting advisers, may also qualify. Other categories exist, so you should confirm your status with your own licensed advisers.

Investors have traditionally treated these strategies as distinct from public markets. They often involve longer holding periods, limited ability to withdraw, and detailed offering documents. Some funds issue a Schedule K-1 for tax reporting, and certain company stock may be discussed in connection with Section 1202 (QSBS). Tax treatment depends on individual circumstances. Past performance does not guarantee future results.

The right independent fund manager may help you sort these categories into plain language. A first conversation is often about what a strategy does, how the manager approaches it, and how it differs from other approaches. A good manager may also help you see how a private fund could fit alongside the rest of your financial picture, though there is no guarantee of that.

Questions you might ask include: What is the strategy and how does it work? What are the main risks? How long might my money be tied up, and what are the terms for withdrawing? What are the fees and expenses, and how are they described in the offering documents? Who handles custody, administration and reporting, and what will I receive for taxes?

You may also ask how the manager verifies accredited status and which exemption the offering relies on. Read the offering documents carefully and consult your own attorney, tax professional and financial adviser. The Hastings Fund is an independent directory. It is not a broker-dealer, funding portal or investment adviser, and it does not recommend, endorse or rank investments.