CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

32.9 INVESTMENT AND OPERATIONAL DUE DILIGENCE PROCESSES

After analyzing individual managers, both qualitatively and quantitatively, most firms eventually proceed to a formal investment recommendation. While investment firms, such as funds of funds, have proprietary, formal processes for recording these recommendations, most would include:

• General manager information
  • Name of firm and contact information
  • Name of specific investment fund/product being recommended
  • Assets under management of the firm and the fund/product
• Description of the management company and regulatory registrations
• Biographical information of key staff
• Investment references
• Description of the investment strategy, including markets traded, liquidity, time frames, and full discussion of investment style
• Quantitative review of the investment strategy
• Discussion of investment risk
• Discussion of current portfolio activities
• Subscription/redemption terms of the fund along with its fee structure, and information about whether investments can be “side pocketed” or redemption restrictions (gates) imposed
• Specific amounts to be invested
• Evidence of investment recommendation approval (i.e., authorized signature)

Again, the specific information and level of detail included in a formal investment recommendation differs from firm to firm. However, the existence of a formal process, backed by independent due diligence, is widely felt to be a required best practice in the industry.

Firms, such as funds of funds, have increasingly ...