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

Chapter 12

Evaluating the Roles of Service Providers

This chapter should further develop a reader's basic understanding of how investors typically go about evaluating an individual fund and a manager for potential investment. The focus of this chapter is how to evaluate the service providers associated with a manager or a fund. The role of a service provider is critical to extending the manager's capabilities and minimizing the staff and investments needed to run a hedge fund as a business. The manager's selection of a prime broker, audit firm, fund administrator, and legal counsel has far-reaching implications for investors. The partner selected to provide support services affects the manager's brand and reputation. It also has direct consequences on the scope of trading, leverage, and capabilities in a variety of ways. Some of the other important service providers that funds must rely on for the stability of their business include the management company's technology provider, insurance carrier, and payroll provider.

Evaluating a manager's philosophy and approach to choosing a service provider is yet another part of the process employed to narrow the list of potential investments. Investors need to move from a long list of managers that are within an attractive style or strategy and that have demonstrated an attractive investment philosophy and value proposition to a final list of potential investments that will ultimately get funded.