Regulatory Risk in Alternative Asset Managers: Navigating Due Diligence and Fund Resilience in 2025

The U.S. Securities and Exchange Commission (SEC) has undergone a seismic shift in 2025, with former commissioner Paul Atkins at the helm steering the agency toward a regulatory agenda that prioritizes digital asset clarity, streamlined compliance, and enhanced retail investor protections. This recalibration has sent ripples through the alternative asset management industry, where managers must now balance innovation with heightened scrutiny. For investors, the stakes are clear: due diligence must evolve to address emerging risks, while fund resilience strategies must adapt to a regulatory environment that is both dynamic and unpredictable.

The SEC's 2025 Regulatory Overhaul: A New Era for Alternative Managers

The Spring 2025 RegFlex Agenda, published by the Office of Information and Regulatory Affairs, marks a departure from the rulemaking priorities of the previous administration. Key initiatives include the withdrawal of fourteen proposed rules from the Gensler era and the introduction of reforms aimed at modernizing custody and trading rules, particularly for digital assets A Significant Shift: Asset Manager Perspectives on the SEC’s Spring 2025 RegFlex Agenda^[1]. For example, the SEC is revisiting custody regulations to address the handling of crypto assets, a move that directly impacts how alternative managers incorporate these assets into investment strategies A Significant Shift: Asset Manager Perspectives on the SEC’s Spring 2025 RegFlex Agenda^[1]. Additionally, the agency has accelerated reforms to expand retail access to private markets, including the elimination of the 15% concentration limit for closed-end funds and the modernization of accredited investor criteria SEC Accelerates Retail Access to Private Markets through Regulatory Overhaul^[2]. These changes signal a regulatory environment that is recalibrating its focus to streamline compliance obligations while democratizing access to alternative investments.

However, this shift is not without risks. The SEC's enforcement actions in 2025 have underscored its commitment to investor protection. For instance, in May 2025, the agency charged Joshua Schuster and his firm, Schuster Enterprises LLC, with defrauding investors by misappropriating funds for a Manhattan real estate project Top 5 SEC Enforcement Developments for May 2025^[3]. Similarly, Unicoin, Inc. and its executives faced charges for misleading statements in an unregistered crypto offering Top 5 SEC Enforcement Developments for May 2025^[3]. These cases highlight the SEC's intensified focus on fraud and misalignment of interests, particularly in private markets.

Investor Due Diligence: Beyond Pedigree and Performance

The evolving regulatory landscape demands a more rigorous approach to due diligence. Investors are no longer satisfied with a manager's pedigree or past performance; they now scrutinize operational infrastructure, governance frameworks, and potential conflicts of interest. For example, the CAIA white paper identifies red flags such as investment allocations, valuations, and related-party transactions as critical areas of concern Alternative Investments: Due Diligence Red Flags^[4]. These risks are amplified in private markets, where non-exchange-traded assets like private equity or real estate rely on internal mark-to-market estimates that may conflict with the interests of General Partners (GPs) Alternative Investments: Due Diligence Red Flags^[4].

To address these challenges, alternative managers are enhancing transparency and leveraging external administrators to improve reporting and compliance Alternative Investments: How Alts Managers Are Adapting^[5]. Multi-manager structures are also gaining traction, allowing investors to diversify across strategies while maintaining clarity in fund performance and risk. For instance, BNY Mellon notes that U.S. managers are increasingly adopting these structures to meet the expectations of a broader investor base, including high-net-worth individuals and retirement plans Alternative Investments: How Alts Managers Are Adapting^[5]. The SEC's 2025 reforms, which emphasize investor access and oversight, further reinforce the need for robust due diligence practices.

Fund Resilience: Embedding Operational and Financial Strength

Resilience is no longer optional—it is a strategic imperative. The KPMG report on firm and system resilience underscores the importance of embedding operational resilience into core business strategies, ensuring it is integrated into transformation initiatives and supply chain planning Firm and System Resilience: Evolving Asset Management Regulation^[6]. For example, asset managers are investing in technology-driven solutions, including artificial intelligence (AI), to optimize compliance and risk management Firm and System Resilience: Evolving Asset Management Regulation^[6]. These tools are streamlining regulatory reporting while supporting innovations like tokenization and ESG integration.

Financial resilience is equally critical. Mercer highlights that asset managers are diversifying investment portfolios across private markets, hedge funds, and real estate to mitigate volatility Building Resilience for Endowments and Foundations in 2025^[7]. This approach aligns with the SEC's push to expand retail access to private assets, as seen in the elimination of the 15% concentration limit for closed-end funds SEC Accelerates Retail Access to Private Markets through Regulatory Overhaul^[2]. Additionally, firms are strengthening liquidity management and private asset valuation practices, recognizing the importance of stress testing in a macroprudential context Firm and System Resilience: Evolving Asset Management Regulation^[6].

Case Studies: Adapting to the New Normal

The convergence of traditional and alternative asset management is reshaping the industry. McKinsey notes that firms with scalable multi-asset platforms and whole portfolio solutions are gaining an edge, particularly as private capital managers expand into wealth and insurance channels Asset Management 2025: The Great Convergence^[8]. For example, semi-liquid products and evergreen funds have gained traction among high-net-worth investors, offering a balance between liquidity and long-term growth Asset Management 2025: The Great Convergence^[8].

However, not all adaptations are smooth. The SEC's enforcement actions against Schuster Enterprises and Unicoin illustrate the consequences of failing to align with regulatory expectations Top 5 SEC Enforcement Developments for May 2025^[3]. These cases serve as cautionary tales for managers who overlook the importance of robust compliance programs. Conversely, firms that proactively modernize their governance frameworks—such as those embedding resilience into business models and supply chains—are better positioned to thrive Firm and System Resilience: Evolving Asset Management Regulation^[6].

Conclusion: A Call for Vigilance and Innovation

The 2025 regulatory environment presents both challenges and opportunities for alternative asset managers. While the SEC's focus on digital assets and retail access opens new avenues for growth, it also demands heightened vigilance in due diligence and resilience planning. Investors must adopt a holistic approach, scrutinizing not only a manager's track record but also their operational infrastructure and alignment with investor interests. For managers, the path forward lies in innovation—leveraging technology, diversifying portfolios, and embedding resilience into every facet of their operations. In this rapidly evolving landscape, adaptability is not just a competitive advantage; it is a necessity.