Are Alternative Investments Safe? Unpacking the Risks and Scams

Are Alternative Investments Safe? Unpacking the Risks and Scams

Oakes & Fosher is actively investigating widespread misconduct in alternative investments, complex financial products increasingly implicated in investor losses due to undisclosed risks, misrepresentation, and fraudulent sales practices. While marketed as exclusive opportunities, these high-risk vehicles often lack transparency, liquidity, and regulatory safeguards—leaving investors vulnerable to significant financial harm.

Alternative investments span private equity, hedge funds, non-traded REITs, structured products, and cryptocurrency schemes. FINRA and SEC regulators have issued repeated warnings about broker misconduct involving these products, including unsuitable recommendations to retirees and unaccredited investors.

At Oakes & Fosher, we represent investors nationwide who have suffered losses due to alternative investment fraud. If you were misled about risks, liquidity, or returns, you may be entitled to recover compensation through securities arbitration or litigation.

Understanding Alternative Investments

Alternative investments are financial assets that fall outside the realm of traditional investments such as publicly traded stocks, bonds, and mutual funds. Unlike conventional vehicles that are typically traded on regulated exchanges and offer a degree of transparency and liquidity, alternative investments often involve complex structures, limited disclosure, and restricted access.

Types of Alternative Investments

These investments can take many forms, with some of the most common including:

Hedge Funds

Hedge funds are actively managed pooled funds that use sophisticated strategies such as leverage, derivatives, and short selling to generate returns. They aim for absolute performance regardless of market direction.
These are typically sold to high-net-worth individuals through private wealth managers or institutional platforms. Hedge funds are often marketed as exclusive, “market-neutral,” or low-volatility strategies. However, they frequently come with high fees (“2 and 20” structures), lengthy lock-up periods, and opaque reporting, making it difficult for investors to fully understand their true exposure and performance.

Private Equity

Private equity involves investments in private companies, often through leveraged buyouts or growth capital arrangements. The investment horizon can range from five to ten years, depending on the fund’s strategy and exit timing.
Access is usually granted through private placement memoranda or limited partnership offerings. These deals are often pitched as high-growth opportunities, but investors may be locked in for a decade with no interim liquidity. Performance data is rarely transparent, and investors depend heavily on fund managers’ discretion and projections.

Venture Capital

Venture capital is a specialized form of private equity that targets early-stage startups with high-growth potential. Investors hope to profit from IPOs or acquisitions.
Commonly marketed through syndicates, crowdfunding platforms, or angel networks, venture capital appeals to those chasing outsized returns. However, most startups fail or underperform, and many venture deals involve long holding periods, high risk of total loss, and little visibility into company operations.

Real Estate Partnerships

These include direct or pooled investments in residential, commercial, or industrial real estate. Structures may include non-traded REITs, limited partnerships, or joint ventures.
Often marketed to retirees as a source of steady income and tax-deferred growth, these investments may be described as “safe” due to their tangible asset base. However, they often come with illiquidity, delayed distributions, and valuation opacity. Overleveraging and sponsor conflicts of interest can also amplify risk.

Commodities

Investing in physical assets like gold, oil, or agricultural products is commonly positioned as a hedge against inflation and currency risk.
Commodities are frequently pitched during inflationary cycles as safe havens, but in practice, they can be highly volatile and speculative, particularly when accessed via structured notes or commodity-linked partnerships. Performance claims may focus on historical peaks without disclosing potential drawdowns.

Crypto Assets

Crypto assets include digital currencies such as Bitcoin and Ethereum, along with tokens tied to decentralized finance (DeFi) projects or blockchain technologies.
These are widely promoted online, often by influencers or self-styled “experts,” and are especially popular with younger investors. While the promise of decentralization and outsized returns is attractive, many crypto offerings are unregistered, lack independent audits, and carry extreme volatility and fraud risk.

Structured Products

Structured products are pre-packaged investments that combine fixed-income instruments with derivative components, designed to produce specific risk-return outcomes based on underlying market indexes, stocks, or interest rates.
Typically sold by broker-dealers and banks, they’re frequently labeled “principal protected,” “market-linked CDs,” or “enhanced yield notes.” The reality is that these products often come with caps on upside, embedded fees, early redemption features, and issuer credit risk that may not be fully disclosed or understood by retail buyers.

While each category has unique characteristics, they all share commonalities that distinguish them from traditional investments, primarily in terms of accessibility, liquidity, and oversight.

Why Investors Turn to Alternatives: Potential Benefits

Despite their complexity and inherent risks, alternative investments continue to attract significant capital, particularly from high-net-worth individuals, institutional investors, and those seeking differentiated portfolio strategies. Several legitimate advantages help explain this appeal:

1. Higher Return Potential: Alternative investments are often associated with the opportunity to generate outsized returns, especially in areas like venture capital or hedge funds that pursue high-risk, high-reward strategies. For example, early investors in companies like Uber or Airbnb reaped exponential gains through venture capital channels that would have been inaccessible via public markets.
2. Portfolio Diversification: Because alternative assets often exhibit low correlation with traditional equities and fixed income, they can act as diversifiers. A hedge fund may perform well during a stock market downturn if it’s positioned with short trades or commodities. Similarly, real estate or infrastructure investments may provide steady returns during volatile equity markets.
3. Inflation Hedging: Real assets such as real estate, commodities, and infrastructure tend to appreciate or generate cash flows that increase with inflation, making them attractive during periods of rising prices. Gold and other precious metals, for instance, have long been considered hedges against currency debasement.
4. Access to Unique Opportunities: Alternatives allow investors to participate in markets or strategies otherwise unavailable through public instruments. Structured products might offer capital protection with upside exposure to specific market indexes. Private equity allows for hands-on operational involvement and value creation strategies unavailable in passive mutual funds.
5. Tax Efficiency: Certain structures, such as real estate partnerships or private placement life insurance, offer favorable tax treatment, an appealing feature for high-income investors seeking to minimize tax liabilities legally.

The Core Risks of Alternative Investments

While alternative investments can offer compelling benefits, they also come with distinct and sometimes opaque risks that investors must understand. These are not merely theoretical concerns, they often play a central role in investment losses and, in some cases, investor fraud.

1. Illiquidity and Lock-Up Periods: Unlike publicly traded stocks or bonds, many alternative investments cannot be easily sold or redeemed. Hedge funds may impose multi-year lock-ups, while private equity and venture capital investments often require 7–10 year commitments. This lack of liquidity can severely limit an investor’s flexibility, particularly during financial emergencies or market downturns.
2. Limited Regulatory Oversight: Traditional investments are subject to robust regulatory regimes under the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA). In contrast, many alternative investments fall outside these frameworks or operate with exemptions. For example, private placements under Regulation D may not be registered with the SEC, significantly reducing transparency and investor protections.
3. Lack of Transparency: Many alternative funds are structured as limited partnerships or private entities, which are not required to disclose detailed financials or investment strategies. Investors may have little visibility into the underlying assets, performance drivers, or valuation methodologies, leaving them reliant on fund managers’ reports and potentially vulnerable to misleading or incomplete information.
4. High Fees: It’s common for alternative managers to charge both management and performance fees. Hedge funds, for instance, frequently use a “2 and 20” structure: 2% annual management fees plus 20% of profits. These fees can significantly erode net returns, especially when compounded over long investment periods.
5. Valuation Risk: Because alternative assets often don’t trade on public markets, their valuations are typically based on estimates or proprietary models. This introduces valuation risk, investors may not know the true worth of their holdings until a liquidity event occurs (such as a sale or IPO), if ever. Inaccurate or inflated valuations can mislead investors and mask poor performance.
6. Limited Access to Audited Financials: Some alternative investments may forego annual audits or use smaller, less reputable accounting firms, further complicating efforts to assess their financial health. In the absence of third-party verification, investors are left to trust the fund sponsor’s representations, an area ripe for potential abuse.

How Alternative Investments Compare to Traditional Investments

To better understand the risks posed by alternative investments, it helps to compare them directly with more familiar, traditional assets like stocks, bonds, and mutual funds.
This comparison shows how alternatives differ in terms of transparency, oversight, liquidity, and cost, factors that directly impact investor protection.

Feature	Traditional Investments (Stocks, Bonds, Mutual Funds)	Alternative Investments
Liquidity	High — can typically be bought/sold daily	Low — often involve multi-year lock-up periods
Transparency	High — public disclosures, pricing, and reporting	Low — limited visibility into holdings and strategy
Regulatory Oversight	Strong — SEC, FINRA, and public exchange rules	Weak — many exemptions from oversight
Valuation Clarity	Market-driven, real-time pricing	Estimated or model-based, often opaque
Fees and Costs	Low — especially for index funds or ETFs	High — layered fees, including performance cuts
Access Requirements	Open to all investors	Often limited to accredited investors
Risk of Misconduct	Lower — with multiple enforcement mechanisms	Higher — due to limited disclosure and oversight
Suitability	Often suitable for retail investors	Often unsuitable for inexperienced investors

Key Takeaway: While alternatives can offer unique opportunities, they frequently come with reduced investor protections, higher costs, and greater potential for misrepresentation. Understanding these contrasts is essential before committing capital to any non-traditional investment.

Fraud and Misconduct in Alternative Investments

While not all alternative investments are fraudulent, the sector has repeatedly been a breeding ground for misconduct. The combination of opaque structures, limited regulation, and high promised returns makes it fertile territory for scams, particularly those targeting unsophisticated or vulnerable investors.

1. Ponzi Schemes Masquerading as Legitimate Funds: One of the most infamous examples is Bernie Madoff, who used a hedge fund structure to execute the largest Ponzi scheme in history, defrauding investors out of an estimated $65 billion. Madoff fabricated returns and paid older investors with new client funds, exploiting the trust placed in alternative fund managers and the lack of third-party oversight.
   A more recent case involves Woodbridge Group of Companies, which raised over $1.2 billion from investors through real estate-related promissory notes. The SEC found it to be a Ponzi scheme, with money from new investors used to pay returns to earlier ones. Many victims were retirees misled by high-yield, low-risk marketing materials.
2. Misleading Performance Claims: Alternative fund managers may present hypothetical or cherry-picked returns, omitting periods of underperformance or using aggressive assumptions in marketing materials. Without audited track records or transparent benchmarks, it’s difficult for investors to verify what’s real and what’s not.
3. Misrepresentation by Financial Advisors: In some cases, financial professionals may misrepresent an investment’s risk profile, liquidity terms, or regulatory protections. A common scenario involves advisors selling structured notes or non-traded REITs to elderly clients without disclosing limited redemption options or potential conflicts of interest, such as commissions or incentive fees.
4. Inappropriate Sales to Unsuitable Investors: Many alternative investments are designed only for “accredited investors”, those with a net worth over $1 million (excluding primary residence) or income exceeding $200,000 ($300,000 with a spouse). Yet some brokers or promoters market them to non-accredited or unsophisticated investors, exposing individuals to complex products they cannot reasonably evaluate or absorb losses from.
   In these cases, unsuitability may rise to the level of securities fraud, especially if the advisor failed to conduct proper due diligence or prioritized commissions over client welfare.

Regulatory Oversight and Legal Implications

Given the growing prevalence, and risk, of misconduct in the alternative investment space, regulators such as the SEC and FINRA have issued repeated warnings and taken enforcement actions to protect investors. Still, the regulatory landscape remains uneven, and many problematic products or practices continue to slip through the cracks.

1. SEC and FINRA Alerts on Alternative Investments: The U.S. Securities and Exchange Commission (SEC) has published numerous investor alerts on private offerings, non-traded REITs, and structured products. In one such bulletin, the SEC emphasized that “[alternative investments] are often complex and risky and may not be suitable for all investors.” It urged investors to ask detailed questions about fees, risks, and liquidity before committing capital.
   Similarly, FINRA has flagged concerns over the way some broker-dealers market alternatives. In Regulatory Notice 10-22, FINRA underscored that firms must perform reasonable due diligence and ensure that recommendations are suitable based on each customer’s profile. Failure to do so may result in disciplinary action and investor restitution.
2. Common Red Flags for Investors: Investors evaluating an alternative investment should be on alert for:
   • Guaranteed or unusually high returns with little or no risk
   • Lack of audited financial statements or independent third-party oversight
   • Complex or unclear investment strategies
   • Pressure to invest quickly or exclusivity pitches
   • Unregistered securities or offerings not subject to SEC reporting

   These warning signs can indicate a high potential for fraud, particularly when combined with a lack of transparency or evasive answers from the promoter or advisor.

3. Legal Standards and Securities Fraud: From a legal standpoint, investors who suffer losses due to misrepresentation, omission of material facts, or unsuitable recommendations may have grounds for a securities fraud claim under federal or state law. The key legal theories often include:
   • Misrepresentation or omission: If the seller fails to disclose material risks or falsely represents an investment’s nature, it may violate Rule 10b-5 of the Securities Exchange Act of 1934.
   • Unsuitability: If an advisor recommends an alternative investment inappropriate for the client’s financial profile or risk tolerance, they may breach fiduciary duties or FINRA suitability standards.
   • Failure to supervise: Brokerage firms may also be held liable for failing to supervise employees who sell unsuitable or fraudulent alternative investments.

   Victims of such misconduct may pursue recovery through FINRA arbitration, civil litigation, or SEC whistleblower channels, depending on the nature of the wrongdoing.

Balancing Opportunity with Vigilance

Alternative investments are not inherently unsafe. When structured transparently, recommended responsibly, and aligned with the right investor profile, they can offer diversification, inflation protection, and attractive returns. However, the very features that make them compelling: complexity, exclusivity, and non-correlation, also make them vulnerable to abuse.

For investors, especially those unfamiliar with private offerings or high-risk products, it’s essential to look past polished marketing materials and promises of outsized returns. Due diligence is not optional. Investors should ask questions, seek third-party validation, and consult unbiased professionals before committing funds.

Unfortunately, many alternative investment losses stem not from market dynamics, but from misconduct: hidden fees, misrepresented risks, unsuitable sales, or outright fraud. If you believe you were misled or suffered losses due to an advisor’s recommendation or a fraudulent scheme, you may have legal recourse.

Frequently Asked Questions About Alternative Investment Risks

1. Are non-traded REITs safe for retirees? Not necessarily. While often marketed as stable, income-producing investments, non-traded REITs can involve high fees, illiquidity, and valuation opacity. Redemption may be restricted for years, and performance is highly dependent on sponsor management and leverage.
2. What legal options exist if I was misled about an alternative investment? If you were sold an unsuitable investment or one where key risks were misrepresented or hidden, you may have a claim for securities fraud, misrepresentation, or breach of fiduciary duty. Legal action may be possible through FINRA arbitration, SEC whistleblower channels, or civil litigation.
3. What are common red flags for alternative investment scams? Watch out for:
   • Guaranteed returns or “no risk” language
   • Pressure to act quickly or claims of exclusivity
   • Lack of audited financials or third-party oversight
   • Unregistered offerings under Reg D or “private placement” status
4. Are structured notes a safe investment? Structured notes may offer downside protection or enhanced income, but they come with serious trade-offs, such as caps on returns, issuer credit risk, limited liquidity, and embedded fees. Many investors misunderstand the true risk/reward profile, making them unsuitable for conservative or unsophisticated investors.
5. Can I sue a financial advisor for recommending an alternative investment? Yes, if the recommendation was unsuitable for your financial situation or risk tolerance, or if material risks were omitted or misrepresented, the advisor or firm may be held liable. Successful claims often involve violations of SEC Rule 10b-5 or FINRA’s suitability rules.

What to Do If You’ve Been Misled or Lost Money

If you invested in an alternative product, such as a non-traded REIT, hedge fund, private placement, crypto offering, or structured note, and believe you were not fully informed of the risks, you may have legal recourse. Many investors are misled by promises of safety or high returns, only to discover hidden fees, illiquidity, or outright fraud when it’s too late.

Whether you’re a retiree sold a “safe” income product, an accredited investor misled by performance claims, or someone unsure whether their losses are actionable, it’s worth speaking with an experienced securities fraud attorney.

How Oakes & Fosher Can Help

At Oakes & Fosher, we represent investors nationwide who have suffered financial losses due to:

• Unsuitable recommendations
• Misrepresentation or omission of material facts
• Broker misconduct or negligence
• Failure to disclose fees, risks, or conflicts of interest
• Fraudulent private placements and Ponzi schemes

We have recovered millions for our clients through FINRA arbitration, civil litigation, and negotiated settlements. Our team brings together deep financial knowledge and decades of legal experience to help you assess your case and pursue justice.

Free Case Evaluation

We offer a free, confidential consultation to review your situation. If we believe you have a viable claim, we’ll guide you through the next steps with clarity and transparency.

Contact Us Today:

• Call: (314) 428-7600
• Visit: www.oakesfosher.com
• Online Form: Secure case review

Don’t wait. The sooner you act, the better your chances of recovering your losses.