Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks

Chapter 12

Hedge Fund Scoring Model and Decision Making

“In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

Theodore Roosevelt

“Informed decision-making comes from a long tradition of guessing and then blaming others for inadequate results.”

Scott Adams

At this point in the process, we have gone through all of the major steps involved in sourcing, screening, and evaluating a group of hedge fund managers. An institutional investment firm would at this time likely present all potential hedge fund candidates to its investment committee for discussion and, eventually, a decision to hire or not (or to place the hedge fund under review on a buy list or “bench”).

In the previous chapter, we reviewed the procedure for performing reference and background checks. In this chapter, we will assume that references were largely positive and that the background check came back from the investigative firm with a “clean” report (meaning no issues).

I have found that one of the best ways to collect and to synthesize all of the information that we have received in the due diligence process is to summarize all the key components of the process into what can be referred to as a hedge fund scoring model.

Hedge Fund Scoring Model

Scoring models have been around for many decades. I have found them to ...