Legal Risks in Alternative Asset Management: Governance and Litigation Trends Reshaping Investor Confidence and Fund Performance

The alternative asset management industry is navigating a turbulent landscape in 2025, where governance failures and litigation risks are increasingly shaping investor sentiment and fund performance. Regulatory scrutiny, particularly from the Securities and Exchange Commission (SEC), has intensified, with enforcement actions targeting fraud, misappropriation, and operational misconduct. These trends underscore a critical shift in investor priorities: transparency, accountability, and robust governance frameworks are no longer optional but foundational to maintaining trust in a sector historically plagued by opacity.

Enforcement Actions and Investor Distrust

The SEC’s 2025 mid-year enforcement update reveals a sharp focus on alternative asset managers. In May 2025, the agency filed charges against two Florida-based firms and their owner for orchestrating a $152 million fraud scheme, while in April 2025, Ramil Palafox was accused of siphoning $57 million from investors in a crypto and forex trading scam [1]. These cases exemplify the SEC’s commitment to holding managers accountable for misappropriation, particularly when retail investors are exploited. Such enforcement actions not only penalize wrongdoing but also signal to the market that regulatory oversight is tightening, potentially deterring future misconduct.

However, enforcement alone cannot fully restore investor confidence. Governance failures—such as conflicts of interest in valuation processes, inadequate ESG compliance, and poor risk management—continue to erode trust. The Financial Conduct Authority (FCA) has emphasized that “good governance and a healthy firm culture” are prerequisites for investor confidence in private markets [4]. Firms that fail to document governance frameworks or address conflicts of interest risk reputational damage and legal exposure, as seen in the 2022 collapse of FTX and the $400 million fine imposed on Och-Ziff Capital Management (now Sculptor) for bribery scandals [1].

Litigation Risks and Fund Performance

Litigation trends in 2025 highlight the fragility of private fund performance. Earn-out disputes in portfolio companies, end-of-life fund challenges, and the rapid growth of private credit markets have introduced new legal risks. For instance, the expansion of private credit has raised concerns about underwriting standards and default rates, with firms facing litigation over misaligned investor expectations [3]. Similarly, litigation funding—a sector projected to grow significantly—now faces heightened regulatory scrutiny as courts demand clearer standards for funding agreements [2].

These risks are compounded by macroeconomic uncertainties. While falling interest rates have improved conditions for alternative asset deployment, geopolitical tensions and regulatory shifts (e.g., Pillar Two reporting requirements) create volatility. Firms that adapt their governance structures to address these challenges—such as by integrating AI-driven compliance tools or diversifying investment strategies—are better positioned to attract capital [3]. Conversely, those with weak governance frameworks face declining fund performance, as evidenced by the $152 billion valuation loss in the FTX collapse and the market-wide crisis triggered by Evergrande’s mismanagement [1].

The Path Forward: Governance as a Strategic Advantage

Investors are increasingly prioritizing governance when allocating capital. A 2025 industry report notes that firms with transparent compliance frameworks and strong leadership track records are gaining a competitive edge [4]. This shift is evident in the growing demand for infrastructure investments, which offer risk-adjusted returns and inflation hedging, but require rigorous due diligence to mitigate governance risks [2].

For asset managers, the lesson is clear: governance is not merely a regulatory obligation but a strategic imperative. As litigation risks evolve and investor expectations rise, firms must invest in robust compliance systems, proactive ESG integration, and transparent communication. Those that fail to adapt risk not only legal penalties but also the irreversible loss of investor trust—a commodity that is increasingly scarce in the alternative asset space.

Source:
[1] Securities Enforcement 2025 Mid-Year Update,
https://www.gibsondunn.com/securities-enforcement-2025-mid-year-update/
[2] 5 Trends in Litigation Funding for 2025: Key Insights,
https://www.haysmewscapital.com/news/litigation-funding-trends
[3] Top Ten Litigation and Regulatory Risks for Private Funds in 2025,
https://www.proskauer.com/blog/top-ten-litigation-and-regulatory-risks-for-private-funds-in-2025
[4] FCA Developments for Asset Management and ...
https://www.cov.com/en/news-and-insights/insights/2025/03/fca-developments-for-asset-management-and-alternatives-firms