Hedge Funds

After reading the assigned articles referencing hedge funds, I had a realization--although I had an understanding of what a hedge fund was--I did not have a clue of what was involved in dealing with hedge fund management. Both articles assigned discussed the lives and the financial impact that high-level executives had with gains and losses pertaining to hedge fund investments. Instead of following-through with my original idea of a presentation based on a “where are they now?” topic, a different approached was taken to address my curiosity of the due diligence process of managing a hedge fund.

The hedge fund due diligence process should begin with an understanding of the characteristics that one is considering. The characteristics of interest are key in gathering the information needed for the type of hedge fund being considered. The defining measurement criteria should be in both quantitative (the criteria that one can use to measure hedge funds) and qualitative (the intangible issues related to hedge funds). In quantitative, one should include: returns, volatility, liquidity terms, fund size, longevity, investment style, investment strategy, fees and asset class. Obviously, the main objective to consider is whether the hedge fund meets most, if not all, of the criteria in the search.

The next step outlined is to contact a hedge fund manager and request information. As a result, information that describes the firm, its strategy, principals, performance and terms of the investment; offering memorandum; subscription documents; and a due diligence questionnaire (DDQ) we be received. Initially, an analyst should make sure they receive the pitchbook, offering memo, and DDQ to say the least. The three documents mentioned will serve as a good starting point to become familiar with the hedge fund manager and may generate additional questions that can be discussed in detail to ensure consistency with your expectations.

Later in the due diligence process, you...