Managing Hedge Fund Managers: Quantitative and Qualitative Performance Measures

CHAPTER 6

You Only Find Out Who Is Swimming Naked When the Tide Goes Out

Look Behind the Numbers

 

 

The numbers—or more precisely performance—are what matter in the end; however, many other factors can impact the persistence and consistency of those numbers. Potential investors need to take a look under the towel to see if their fund managers are really wearing Speedos or, as Warren Buffett put it, to see who is swimming naked. The due diligence process will be a large paper trail of regulatory, marketing, and business documents that will begin to build an image of what the manager is all about and how he runs his hedge fund business. In essence, you are gathering information as you would if you were buying a business. If the manager passes your test, you indeed will become a partner, a limited partner in a hedge fund.

At this point, the initial screening of your hedge fund has been completed. You have a solid understanding of the fund’s performance, and the logical next step is to obtain some other pertinent, detailed information. This is the heart of the due diligence process. The key point to remember during due diligence is that the numbers provide questions, not ultimate answers. It’s critical that investors dig deeply into the fund and not become infatuated with the “hot dot” of performance.

FILLING OUT THE DDQ

The Due Diligence Questionnaire (DDQ) is an extensive document that allows you to build a rubric of the fund and manager in depth across all aspects of the firm. ...