A concentration limit caps how much of an investor’s wealth may be placed in a particular investment or category — in the alternatives market, most visibly the rule that a purchase of a non-traded product shouldn’t exceed roughly 10% of the investor’s liquid net worth. It is the position-sizing discipline written into the offering documents themselves.
Where the limits come from and how they apply
The 10%-of-liquid-net-worth convention originates in state blue sky merit review and NASAA guidelines: as conditions of registering non-traded REITs and DPPs, many states require prospectus suitability standards including concentration caps — some applying per-program, some across a sponsor’s affiliated programs or the non-traded category broadly, with state-by-state variations itemized in every prospectus’s suitability section. Selling firms layer their own policies on top (house limits on alternatives as a portfolio percentage, per-product and per-sponsor caps), enforcement happens through the subscription questionnaire and supervisory review, and over-concentration is among the most common allegations in the category’s arbitration history — which is why the documentation matters as much as the math. The advisory-side translation: for RIAs, concentration is a fiduciary judgment rather than a printed threshold, but the same logic governs — illiquid, valuation-opaque positions sized so that a bad outcome is survivable and a redemption suspension is inconvenient rather than catastrophic. The limit’s quiet second function: it forces the liquid-net-worth conversation (what’s actually accessible, excluding home and restricted assets) that suitability analysis needs anyway.
Related terms
Suitability · Blue Sky Laws · Subscription Agreement · Non-Traded REIT · Liquidity
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