How To Practice Due Diligence When Investing In Hedge Funds

Post date: Feb 15, 2018 4:30:41 AM

Before putting one’s money in any investment vehicle, some form of due diligence should be practiced because risks are inevitable. Hedge funds, no matter its potential to vastly improve diversification and balance risks, are no exception to the need for due diligence.

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Below are some ways to conduct due diligence before investing in hedge funds:

• • Request for necessary documents from investment manager: The first document to request and review is the pitchbook, which contains all the necessary details about fund manager, as well as their hedge fund strategy. Once the background on the manager is deemed satisfactory, the fund’s prospectus or offering memorandum, a set of documents that lists the investment strategies, fees required, operating manuals, mandates, and more, should be reviewed, too.

  • Assess the investment terms: Before agreeing to transactions with a hedge fund manager, everything under the investment terms must be scrutinized. These terms include, but are not limited to, minimum allocation amounts, share classes, fee terms and structures, redemption terms, and notice periods.

  • Understand any limitations on the right to redeem shares: Unfortunately, some investors fail to study how limited the redemption of shares or funds is. This can result in being shortchanged because they had not known of lock-up periods or because of frozen redemptions without notice from the hedge fund manager.

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Scott Tominaga has about two decades of experience in the hedge fund and financial services industry. He has successfully interacted with fund managers and professional service providers, helping create efficient and transparent operations and reporting structures in several operational infrastructures. Learn more about what he does by visiting this website.