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Check on DFMs’ use of alternatives

Advisers need to do thorough due diligence on discretionary fund managers and their use of alternative investments, warns Defaqto.

In its new guide to alternative investments, Defaqto says more due diligence in relation to use of alternative asset classes is needed with discretionary management services than for multi-manager funds. It says multi-manager funds are more transparent and their performance is easier to monitor than that of a DFM.

Defaqto suggests advisers ask the DFM what percentage of a portfolio is invested in alternative investments and what success the DFM has had in managing them. Asking the DFM if it has written any current market commentary on how it uses alternative assets in the portfolios, including the level of exposure and the reasons for any changes, could also be helpful for advisers in doing due diligence when selecting a DFM.

Defaqto insight analyst for funds and author of the report Fraser Donaldson says: “It is very important that discretionary managers, and multi-managers for that matter, are prepared to consider alternative strategies as they will provide additional flexibility and diversification.

“The market has moved on, in that scepticism of some of these products is not an excuse for ignoring them.”

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