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

38.7 DUE DILIGENCE ISSUES ARISING IN THE CONTEXT OF FUNDS OF FUNDS

When selecting a single FoF from more than 2,000 active FoFs in existence, prospective investors need to have a clear due diligence process. A useful tool in this process is the Alternative Investment Management Association (AIMA)'s Illustrative Questionnaire for Due Diligence of Fund-of-Funds Managers. Most FoFs have adopted this questionnaire to provide investors with answers to standard questions. While this questionnaire offers a starting point for due diligence, most investors will modify the standard questions to incorporate information that is needed to assess the strategy and risks of a given investment manager.

The AIMA questionnaire is divided into the following 10 areas:

1. Background. Investors should review the history of the FoF management firm and validate its business model. This requires reviewing items such as the following:

a. The key milestones and significant events

b. The total assets under management and their evolution over time

c. The main clients and their types

d. The ownership and its evolution

e. The size of the staff and any recent staff changes

f. The activities performed by the staff (via organizational chart)

g. The qualifications of the staff to perform its duties (e.g., education and professional background)

h. The sources of revenue and operating costs—some firms may have multiple business lines or run multiple products

i. The compensation scheme for key employees