Chapter 11
Performing Due Diligence on Specific Managers and Funds
This chapter is concerned with the process of performing due diligence on a specific manager that is being considered for investment. Due diligence is the term used to describe the process of evaluation and analysis that an investor follows to get comfortable with a strategy, a manager, and a fund prior to making an investment. It includes all the steps that are needed to get to know why and how a fund came into being; the skills its founders or current partners claim to have mastered; the evaluation of the timeliness, accuracy, and consistency of manager and fund information; the reliability and independence of service providers; and far more. The chapter is designed to describe some of the common procedures used to investigate a manager's trading and investment skill; ability to manage operations, credit, and liquidity risk; and importantly, the ability to run a business.
Investors would be wise to assess all three skill sets need to run a modern-day hedge fund—investment, operational, and business skills—before committing capital to any fund. Those who do lower the risk of surprise and improve the prospects of getting what they anticipated from any opportunity. Managers today are rarely good at all three things. In fact, due to the changing demands of institutional investors and the failure of 2008, it is most often impossible for any one person or leader to process a high level of competency in all three areas. ...
