Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

If it Looks too Good to be True, it Probably is

The individual employees who are performing investment due diligence should always remember to trust their own judgment. If it looks too good to be true, it probable is. Too often, firms make allocation decisions by committee. In this setting, it is easy for one voice, perhaps one's boss, to direct the decisions of the team. Individuals may feel too intimidated to speak out or to communicate details that may reflect negatively on a manager who is well known to the firm or who has established a high-level relationship with the CIO or other members of the organization. It is essential that people who come across facts, figures, opinions, references, or any other relevant information uncovered during their work escalate their concerns. If something in a manager's track record, background, or pedigree comes into question, analysts must raise their hands and speak their minds. Very often, the most notorious frauds and funds that were behaving badly were quite obvious to those in direct contact with the manager. Often only in retrospect is everyone able to see what should have been obvious to all. In the end, no matter how uncomfortable, escalation of questionable information will benefit the organization and will be appreciated. If things don't feel right or just don't pass the smell test, then they should be voiced within the research team before ever getting to the investment committee for allocation decisions or approval.