Financial Security (FinSec) Series with  Dr Philip Takyi: Alternative Pool Investments in the United States

… An assessment of REITs, Hedge Funds and Direct Participation Programs — The Role of Cybersecurity and Emerging Gaps

In search of portfolio diversification beyond traditional equities and bonds, many U.S. and global investors turn to alternative pool investments, such as real estate investment trusts (REITs), hedge funds, private equity funds, and direct participation programs (DPPs).

These vehicles promise exposure to real estate, private companies, or niche strategies that may behave differently from public markets, offering potential for higher returns, reduced correlation, and uncorrelated sources of value. As the global investment community grows more sophisticated, alternatives have become a mainstay of institutional and high-net-worth portfolios.

Yet, despite their attractiveness, these alternative pools pose distinct risks, illiquidity, opacity, complex structures, and operational vulnerabilities. In recent years, cybersecurity has emerged as a critical risk for alternative investment vehicles, as funds and their service providers increasingly rely on digital infrastructure for trading, reporting, data management, and asset servicing.

Cyber incidents, data breaches, ransomware attacks, denial-of-service disruptions, or theft of proprietary algorithms, can inflict severe financial losses and irreparable reputational damage.

What Are Alternative Pool Investments? A Broad Overview

The term alternative investment broadly refers to any asset class beyond traditional publicly traded stocks, bonds, and cash. Examples include real estate, private equity, hedge funds, commodities, infrastructure, private credit, and more.

Alternative “pool” investments, structured investment vehicles that aggregate capital from multiple investors, enable participation in these asset classes without requiring each investor to individually manage underlying assets. Typical pooled vehicles include:

• Real Estate Investment Trusts (REITs): corporations or trusts owning income-producing real estate, which distribute rental income (or net operating income) as dividends.
• Hedge Funds: private investment funds employing a variety of strategies (long/short equity, macro, event-driven, arbitrage, etc.), often using leverage and aiming for absolute or risk-adjusted returns.
• Direct Participation Programs (DPPs): structured vehicles, often limited partnerships, that invest directly in real estate projects, energy (oil & gas), natural resources, or small/ private businesses, giving investors pro-rata profit/loss shares.

 Strengths and Challenges of Major Alternative Pools

 Real Estate Investment Trusts (REITs)

Strengths:

• REITs provide liquidity (for publicly traded REITs) alongside exposure to real estate, real assets that often benefit from rental income, inflation hedging, and diversification relative to traditional equities.
• For investors wishing to avoid direct property management, REITs offer professional management, property diversification, and the benefit of pooled capital.

Challenges:

• As with any real-estate-based investment, performance depends on property occupancy, rental rates, interest rates, and economic conditions. REITs are sensitive to interest-rate fluctuations and real estate market cycles.
• Real estate investments may involve significant operational and management risk, especially where properties require active asset management, capital expenditure, and tenant management.

 Hedge Funds

Strengths:

• Hedge funds can pursue a wide array of strategies, long/short equity, global macro, arbitrage, event-driven, distressed securities, derivatives-based strategies, offering flexibility, potential for absolute returns, and utility in hedging or diversifying a broader portfolio.
• For sophisticated investors with higher risk tolerance, hedge funds can provide access to complex strategies, leverage, and skill-based asset management, that are difficult to replicate via public markets.

Challenges:

• Hedge funds often lack transparency relative to mutual funds. They may have limited disclosure, infrequent reporting, and complex fee structures (management fees performance/incentive fees), which can erode net returns.
• Liquidity constraints are typical: many hedge funds impose lock-ups, redemption gates, or notice periods, which reduce flexibility.

 Direct Participation Programs (DPPs)

DPPs, often structured as limited partnership investments in real estate projects, energy ventures, small private companies, or specialty assets, offer unique advantages:

• Direct exposure to private ventures or projects, which may yield higher returns than public equity in exchange for greater risk and illiquidity.
• Potential tax benefits, particularly in U.S. context when investments are structured to take advantage of pass-through taxation or depreciation, as is common in real estate or energy DPPs.

However, DPPs carry substantial disadvantages:

• Liquidity risk: Since DPPs are typically illiquid, investors may be locked in for several years until a project matures or exits, there may be no secondary market.
• Lack of diversification: Because capital is committed to a single project or a small number of projects, idiosyncratic risk is high.

 The Rising Importance of Cybersecurity in Alternative Investments

As alternative investment vehicles increasingly depend on digital platforms, for trading, investor servicing, reporting, data management, and vendor relationships, cybersecurity has emerged as a core risk category. This trend spans REITs, hedge funds, private equity funds, and DPP managers. Industry experts refer to cybersecurity not just as an operational concern, but as a fundamental component of risk management and asset-protection strategy.

 Why Cyber Risk Matters for Alternatives

• Sensitive data and proprietary information at risk: Hedge funds often hold highly confidential information, trading algorithms, strategy blueprints, investor identities, counterparties, valuations. A breach could compromise competitive advantage or client trust.
• Third-party/vendor exposure: Many alternative investment managers outsource functions (administration, custody, transfer agency), or rely on property managers (for REITs), external service providers, or software vendors. A breach or failure at a vendor can expose the fund.
• Operational disruption: A cyberattack, such as a denial-of-service or ransomware, can disable trading systems, interrupt communication with brokers, prevent fund administrators from issuing redemptions or valuations, or block investor access.

What Alternative Investments—and Their Governance—Still Need

Despite the growing awareness of cybersecurity and other risks, significant gaps remain in how alternative pools are managed, regulated, and structured. The following areas need attention:

Operational Due Diligence (ODD) Must Deepen and Standardize

While many large funds now apply robust ODD when onboarding investors, smaller funds and DPP sponsors often do not. ODD should cover not only investment strategy and asset quality, but also:

• Valuation methodologies (especially for illiquid assets)
• Business continuity and disaster recovery plans
• Cybersecurity posture, including vendor risk, data protection, system resilience
• Governance structures, conflicts of interest, and transparency of fee and risk disclosures

Cybersecurity Governance Needs Elevation to Board and Investor Level

Even though many firms acknowledge cyber risk, fewer elevate it to proper governance. A 2025 industry survey found that only 46% of large alternative funds reported cybersecurity at every board meeting; 38% raised it only annually; about 1 in 6 firms raised it only in response to incidents.

This reactive, ad-hoc approach leaves funds exposed. Cybersecurity must be treated as a strategic risk: boards should require regular security audits, periodic penetration testing, third-party vendor reviews, identity and access management, and incident response plans, not just correspond as compliance checkbox.

 Transparency and Disclosure Must Improve, Especially for Illiquid and Private Vehicles

Transparency remains a major challenge in alternatives: many hedge funds and DPPs provide limited reporting, infrequent valuations, and minimal public disclosures. For investors, especially institutional ones, this opacity increases risk and reduces capital-market confidence.

Greater transparency would improve investor trust, facilitate better risk monitoring, and encourage broader adoption. Possible improvements:

• Standardized periodic reporting (quarterly or semi-annual) including audited financials, asset valuations, exposure summaries.
• Disclosure of valuation methodologies, liquidity provisions, redemption terms, fees, leverage, and risk concentrations.

Strengthen Vendor and Third-Party Risk Management

As many alternative funds rely on third-party service providers, administrators, custodians, brokers, property managers, IT vendors, the “weakest link” often lies outside the fund itself. A breach at a vendor can propagate to multiple funds across the industry. This systemic vulnerability requires:

• Rigorous vendor due diligence before onboarding
• Ongoing vendor audit and compliance obligations
• Contractual requirements for cybersecurity standards, data protection, incident reporting

Lessons Learned: How the Alternative Investment Industry Must Adapt Cybersecurity Is Not a Technical Afterthought — It’s a Strategic Imperative

As firms adopt digital tools, data platforms, third-party vendors, and globalized workflows, cybersecurity must be integrated into fund governance, operations, and strategic planning. Funds that treat cyber as “IT’s problem” risk data loss, disruption, legal liability, and reputational damage, all of which undermine the value proposition of alternative investing.

Strategic cyber risk management, including independent audits, vendor oversight, board-level governance, and ongoing risk metrics, can differentiate strong managers from those likely to face disruption or failure.

Transparency and Operational Discipline Build Investor Trust

The success of alternatives depends heavily on investor confidence. Transparent valuation, regular reporting, clear disclosure of risks (including cybersecurity, liquidity, fees), and a strong operational control environment are essential for long-term viability and to attract a broader range of investors beyond high-net-worth individuals.

 Conclusion

Alternative pool investments, REITs, hedge funds, and direct participation programs, play a vital role in modern investment portfolios. They offer exposure to real estate, private ventures, special strategies, and assets uncorrelated with public markets. But these benefits come with significant challenges: illiquidity, operational complexity, valuation opacity, and, increasingly, cybersecurity risks.

As the alternative investment industry matures, the importance of operational due diligence, transparency, vendor risk management, liquidity discipline, and robust cybersecurity governance continues to grow. Investors, fund managers, and regulators alike must adapt to an evolving threat landscape where cyber incidents, data breaches, and vendor vulnerabilities pose existential risks.

Firms that integrate cybersecurity into strategic planning, adopt transparent reporting and strong governance, and commit to rigorous operational discipline will likely emerge as leaders, attracting capital from institutional and retail investors seeking both return and resilience.

References

Alternative investment. (n.d.). In Wikipedia. https://en.wikipedia.org/wiki/Alternative_investment Wikipedia

AIMA. (2025, November 24). Cyber risk intelligence: Turning data into resilience for alternative investments. https://www.aima.org/article/cyber-risk-intelligence-turning-data-into-resilience-for-alternative-investments.html AIMA

Deloitte. (2024). Cybersecurity risk and the fund industry: Facing growing threats. Deloitte Insights. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-advisory-mfdf-cyber-final.pdf Deloitte

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