Due Diligence for Hedge Fund Managers

Since reported hedge fund performance is of doubtful significance and risk monitoring is difficult, due diligence takes on special significance when investments in hedge funds are being considered. Some of the things investors must determine include:

  1. The structure of the fund
    • Legal entity
    • Identity of manager
    • Domicile
    • Regulatory regime
  2. Strategy
    • Style
    • Instruments used
    • Benchmark
    • Niche
    • Current holdings
  3. Performance data since inception for all funds under management
  4. Risk management
    • What risks are measured
    • How are they measured
    • How are they controlled
    • How is leverage employed
  5. Research
    • Has the firm’s research led to changes in strategy
    • Strength of research efforts
    • Research budget
    • Personnel
  6. Administration
    • Lawsuits
    • Employee turnover
    • Disaster recovery plans
  7. Legal and Regulatory
    • Fee structure
    • Lock-up period
    • Minimum and maximum subscription amounts
    • Drawback provisions
  8. References
    • Professional
    • Other investors in the fund
For more information, see all articles on: Active Management, Alternative Assets, Asset Allocation, Hedge Funds, Portfolio Management, Risk Management

See also:
  • Are Hedge Fund Strategies Just About Leverage?
  • Hedge Fund Strategies: Risk Arbitrage
  • Due Diligence for Alternative Investment Managers
  • Hedge Fund Databases: Sample Selection Bias
  • Strategy and Due Diligence for Private Equity Investments
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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