DETROIT - Investing client assets in alternative products and strategies can expose financial advisers to a whole new set of challenges for due diligence.

While some alternative investments, such as hedge funds, will introduce risks associated with a less regulated marketplace, other products that fall under more stringent regulatory scrutiny can also introduce potential pitfalls due to their unique structures and investing strategies, according to industry sources.

"The due diligence process should consist of both quantitative and qualitative research," said Hossein Kazemi, academic liaison for the Chartered Alternative Investment Analyst Association in Amherst, Mass.

Mr. Kazemi, who is a professor of finance at the University of Massachusetts Amherst, explained that beyond calculating performance and measuring fees, the due diligence process should also include face-to-face meetings with investment managers, as well as thorough personal and professional background checks. Establishing a certain level of comfort with investment managers is a primary concern for J. Patrick Collins Jr., principal of Greenspring Wealth Management Inc. in Towson, Md.

"First and foremost, when we're looking at an alternative investment, we need to feel comfortable about working with the people at the management firm," he said. "Ideally, we'd want to be referred to an alternative investment by somebody we know and trust."

Getting beyond stocks, bonds and plain-vanilla mutual funds requires a new set of rules for most advisers, and many of them rely on patience and meticulous attention to detail when it comes to some of the more esoteric products.

"The first thing you always do is discount any back-tested data that's being presented," said Derek Imes, president of Principia Investment Advisors LLC in Bogart, Ga.

Beware of hidden fees

While some in the alternatives arena will make the case for paying attention to returns after fees are deducted, savvy advisers warn potential investors to dig deep into the paperwork and look out for hidden fees. "Most people will look at the returns net of fees, but you still need to think about how those fees will look during a negative year," said Nicholas Rowe, president of Focus Capital Wealth Management Inc. in Bedford, N.H.

Because many alternative strategies are less liquid, advisers should approach such investment allocations as they would a long-term business partnership, according to Jamie Biddle, chairman and chief executive of Verdis Investment Management LLC in West Conshohocken, Pa.

Mr. Biddle, who said advisers and individual investors tend to follow the lead of institutional investors, said the appetite among advisers should continue to grow.

"I would argue that there should be more demand for alternatives among advisers," he said.