We have drawn up these questions to give guidance to investors who are considering investment opportunities in Hedge Funds.
Governance
1. Are you satisfied that the fund has a truly independent board in place?
2. Do members of the board also hold posts on a large number of other boards?
3. Is the fund exempt from regulatory oversight?
Valuation/audit
4. Has the fund disclosed who its auditor is?
5. Has the fund's performance been audited by an external, independent auditor?
6. Is the auditor unrecognised, with no trading history?
7. Is the fund manager controlling valuations and providing portfolio prices?
8. Has there been any difficulty verifying the value of the assets concerned?
9. Is the net asset value (NAV) consistently issued late?
Third parties
10. Are you satisfied that the counter party (or parties) is (or are) independent?
(A counter party is any person or service that the fund deals with)
Staff/operations
11. Have the prime brokerage, auditor, directors or administrators changed?
12. Do many employees leave the organisation? This applies equally to back office, compliance and finance/audit staff?
13. Do key members of staff have any criminal records?
14. Do key members of staff have a record of having been involved in civil disputes?
15. Have there been any regulatory actions against the hedge fund manager?
16. Have the fund managers consistently displayed perfect market timing?
17. Have there been unusual transfers or activity near a quarter or year end?
18. Is there an apparent restriction on access to the fund to elite investors?
19. Has the fund taken large positions in companies? This may indicate an intention to sell a proportion of the holdings to influence the value of the remainder.
20. Have there been any market rumours and/or complaints from investors about the fund and its management?
Disclosure
21. Is there a lack of disclosure to the investors and transparency on trading positions? But remember that some positions may, by their very nature, be less transparent than others.
22. Have there been any misrepresentations in investor communications? This may be in relation to returns or the background of the fund managers.
23. Have the returns displayed month on month inconsistent with the indices and the performance of peers?
24. Are the returns and stated trading strategy inconsistent with the volume of trading actually carried out?
25. Has there been an inability to replicate returns?
Segregation of functions
26. Have you looked at the organisational chart to find out about the backgrounds of the key post holders? Remember, it is not a good business plan if key functions are all controlled by one person.
27. Is there a strong relationship between the prime broker and the fund manager so that the prime broker may be the only person valuing a product?
Administration
28. Is the administrator small in relation to the portfolio size?
29. Is the administrator an expert in the particular investment strategy the fund is adopting?
30. Is the fund self administered?
31. Are there a large number of reconciliation items each month? That is where there are discrepancies between the data provided by the fund manager and the administrator)
Custody
32. Are you satisfied that there is an independent custodian?
Redemptions
33. Have redemptions been actively discouraged?
34. Have there been many redemption requests?
35. Have there been any failures to honour redemption requests?
Existing clients
36. Have the financial reports been timely?
37. Have the reports been easy to understand?
38. Has the hedge fund manager responded positively to questions about financial performance?
39. Do you have any concerns about the hedge fund manager's part in the hedge fund's performance?
Would you invest more money with the hedge fund manager?
