On January 28, 2014, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert summarizing its observations on the due diligence practices of investment advisers who recommend alternative investments, such as hedge funds and private equity funds to their clients.

The Risk Alert compares current industry trends and practices in advisers’ due diligence processes observed over the past six years to prior observation periods and notes certain deficiencies. In general, OCIE observed that advisers have enhanced and expanded the scope of the alternative investment due diligence processes. Specifically, OCIE noted that advisers are seeking more information directly from the managers of alternative investments, while using third-parties to supplement and validate the data provided. OCIE also noted that advisers are performing additional quantitative analyses and risk assessments to detect aberrations in investment returns and evaluate how closely a manager implements its stated investment strategy.

OCIE also identified certain deficiencies in some advisers’ due diligence processes. Specifically, the Risk Alert observed that some advisers omitted alternative investment due diligence policies and procedures from their annual compliance review and/or provided clients and potential clients with potentially misleading information about the depth and breadth of their due diligence process.

The Risk Alert is available at: www.sec.gov/about/offices/ocie/adviser-due-diligence-alternative-investments.pdf