Step 1: Select Good Managers

Initial screens rule out 90% of potential investments for reasons such as:

  • Inappropriate liquidity
  • Operational weakness
  • Poor performance

Step 2: Understand the Managers

Detailed checks to understand the managers, e.g.:

  • Check backgrounds and criminal records
  • Full operational and strategy due diligence
  • Legal review of documentation

Step 3: Monitor Portfolio

Ongoing monitoring, including:

  • Report on each manager’s performance weekly, as well as detailed monthly calls or visits
  • Leverage Review
  • Financial Statement (Audit) reviews

Step 4: Communicate Effectively

Investing with Hedge Funds and Hedge Funds of Funds provides valuable information flow from managers to inform client’s overall strategy.

Due Diligence is Risk Management

Examples of avoidable events that can cause losses:

Fraud: Operational Due Diligence can help detect and prevent fraud by:

  • Verifying service providers (Administrator, Auditor, Lawyer)
  • Comparing to peer group for anomalous returns

 

Operational Risk: Detailed Due Diligence can highlight operational risk, for example:

  • Does he have the experience and skills required?
  • Does he have sufficient Disaster Recovery in place?

 

Market Risk: Can never be eliminated, but can be mitigated by activities such as:

  • Understanding liquidity of markets
  • Internal risk management