Financial Education

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

The Structure of Hedge Funds

Alternative Routes to Hedge Fund Return Replication

Hedge Fund: Kurtosis Definition & Explanation : Hedge Fund