How Investing Firms Mitigate Risk When Holding Real World Assets

Investing firms constantly manage a wide range of risks. These risks differ based on the asset class, market environment, and geographic exposure. While digital innovations and financial products evolve, the goal remains the same: preserve capital and generate returns without exposing the portfolio to uncontrolled volatility.

Each type of asset carries its own risk profile. Public equities can shift based on earnings or sentiment. Bonds react to interest rates and credit ratings. Commodities respond to global supply and demand. However, when firms deal with assets that are tied to legally enforceable ownership, the risk picture changes.

Such holdings often require added diligence, legal safeguards, and operational oversight. Managing these risks involves looking beyond traditional financial indicators and addressing areas like legal structure, asset control, and long-term reliability.

This article discusses how investing firms can mitigate risks when holding real-world assets.

Tokenization and Legal Ownership

In recent years, an increasing number of investment firms have begun utilizing blockchain technology to streamline the management of document-intensive assets. The process involves turning a financial product or physical item into a digital representation, which can be tracked and traded more efficiently. This has led to an increase in tokenized investments backed by tangible assets.

According to McKinsey & Company, the adoption of tokenization is increasing gradually. It is estimated that tokenized market capitalization will reach a whopping $2 trillion by 2030. When a blockchain-based token represents an actual asset, such as real estate or tangible commodities, it is referred to as a real-world asset.

As stated by Polymesh, several investment assets, including equities, commodities, real estate, debt, art and collectibles, etc., can be tokenized. Tokenizing these assets can offer numerous benefits, including automated efficiency, streamlined liquidity, increased transparency, enhanced compliance, and protocol-level innovation.

Unlike purely digital tokens, a real-world asset depends on both on-chain and off-chain elements working in sync. Smart contracts handle automation and transfer, but the asset’s legal status and enforceability rely on agreements, documentation, and custodianship outside the blockchain. This dual structure presents unique risks, and managing them requires a broader set of tools.

Independent Verification and Asset Backing

Before committing to an investment, firms conduct extensive due diligence. For real-world assets that have been tokenized, this process is more detailed than usual. A token’s legitimacy doesn’t rest on code alone; it rests on the existence, quality, and legal clarity of the asset behind it.

This means verifying whether a property truly exists, whether income streams are stable, or whether a loan contract is enforceable and up to date. Firms often hire independent auditors or legal experts to verify claims made by the asset issuer.

In some cases, they utilize platforms that provide live feeds of underlying asset data, such as rental payments or collateral conditions. This allows them to monitor the asset’s health in real time.

Due diligence also involves examining the team or organization behind the asset. Track records, conflicts of interest, and legal history all matter. A promising token becomes far less attractive if the team managing the asset has a history of poor execution or legal disputes.

What challenges do firms face when verifying real-world collateral in developing markets?

In developing markets, transparency issues, limited access to public records, and weak property rights systems make it harder to verify collateral. Firms may struggle with outdated documentation, a lack of digitized records, or limited legal recourse in disputes, requiring more on-the-ground verification and local partnerships.

Diversification and Structural Balance

Diversification is a fundamental principle in investment risk management. As noted by Forbes, diversification reduces risk, provides exposure to different opportunities, and smooths returns. On the other hand, failing to diversify increases the risk of losing a significant amount of capital. Asset allocation, sector diversification, and geographic diversification are the three primary types of diversification.

For firms dealing with tokenized or legally backed assets, it plays a broader role. Beyond simply spreading capital across asset classes, firms examine how each investment behaves under:

• Various scenarios
• Economic downturns
• Interest rate fluctuations
• Geopolitical instability
• Other factors

When holding real estate-backed tokens, for example, a firm may spread investments across regions to limit exposure to local policy changes. In private credit, they may diversify by loan type, borrower sector, or repayment structure. By doing so, they avoid clustering too much risk in one area, even if returns are appealing.

They also consider structural diversification. This includes selecting assets issued under different legal jurisdictions, utilizing various custodial models, and employing different token standards or blockchain networks. These decisions help firms remain resilient against isolated risks, such as regulatory changes or platform-specific technical issues.

Can over-diversification become a risk in itself for investing firms?

Yes, over-diversification can dilute returns and make portfolios harder to manage. It may also reduce a firm’s ability to closely monitor the performance or risk exposure of each asset. Some investments require specialized knowledge, so spreading resources too thin can lead to missed issues or poor decision-making.

Smart Contract Audits and Systemic Risk Controls

Technological risks must be handled with the same care as legal or financial ones. Tokenized assets often rely on smart contracts, which are automated codes that govern the transfer, valuation, or access to assets.

As the World Economic Forum indicates, these are self-executing agreements embedded in blockchain. Since they can be executed without human intervention, they offer an excellent opportunity for mitigating cyber and legal risks. In fact, the smart contract market is expected to reach $73 billion by 2030.

If these contracts are flawed, the risk isn’t hypothetical. Funds can be locked up, stolen, or misrouted.

Investing firms often require third-party audits before interacting with a smart contract. These audits check for common security issues, such as logic errors, reentrancy vulnerabilities, or unclear access permissions. Some firms even conduct multiple audits or internal code reviews for higher-value assets.

System-level risks are also considered. That includes the health of the blockchain platform itself. If a network suffers from congestion, security breaches, or poor governance, the value of all tokens built on it could be affected. Firms often evaluate factors like network stability, uptime records, and decentralization levels before onboarding assets.

Are smart contract risks always technological, or can they also be economic in nature?

Smart contract risks are not limited to code flaws. Economic risks arise when contract logic fails to account for real-world scenarios, such as extreme market volatility or liquidity shortages. If automated rules trigger under the wrong conditions, firms may face forced sales or missed payments despite the code being technically sound.

Regulatory Surveillance and Compliance Mapping

Global firms face complex regulatory environments, especially when assets span across multiple countries. Risk management teams maintain detailed compliance maps that indicate the location of each asset and the applicable laws.

However, managing regulatory compliance remains a challenge due to the ever-changing laws. As noted in a KPMG report, asset management regulation is continually evolving. Many regulators are shifting focus from policymaking to supervision. Therefore, asset managers should seize this opportunity to build stronger regulatory compliance foundations.

They also monitor upcoming regulations, particularly those related to digital securities, cross-border investment rules, and financial reporting standards. Being early to spot a regulatory change allows firms to adjust their portfolios or renegotiate terms before those changes result in losses or disputes.

Firms sometimes work with local legal counsel in each jurisdiction or utilize compliance technology platforms to stay up-to-date. This kind of proactive regulatory management is key to avoiding fines, asset freezes, or legal conflicts.

Investing firms have developed layered strategies to manage risk when dealing with real-world assets. Whether it’s through legal reviews, smart contract audits, custody controls, or regulatory monitoring, each layer reduces exposure to avoidable threats. These strategies enable firms to protect capital while still capitalizing on new opportunities that combine traditional value with digital efficiency.

The growth of real-world asset tokenization presents new opportunities for institutional portfolios. However, they can only offer benefits when paired with a clear and careful approach to risk at every level.