Taming Risk in Alts to Fit Into Client Portfolios

"We look at reports and due diligence reports from the law firms," he said in an interview with ThinkAdvisor.

"As kind of a final step for me, I physically visit the fund sponsor myself," the Fort Worth-based advisor explained "So we will not go into those funds unless we have gone to their offices personally to go through the process ourselves. It's more time consuming, of course, but it gives me the comfort level to be able to then place clients into it."

The due diligence has paid off so far, he adds: The income-alternatives are producing higher income than that available from bond portfolios or income-oriented equity portfolios.

For growth investments, Karsten aims for total returns in the high teens and the funds are producing those results. "That's what we would be targeting and on an average basis with the fund; that's where we have seen those returns," he says.

"Some of them are better than others over the years, but that's where we typically feel we need to be to justify what is in many cases a little bit higher risk profile," the advisor stressed.

In 2013, the Bloomberg Hedge Funds Aggregate Index returned an average of 7.4% in 2013. As for private equity, distressed-asset funds were up 18% in 2013, and buyout funds generated a 16% return, according to Bain & Co.