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Managing Hedge Fund Risk and Financing: Adapting to a New Era by DAVID P. BELMONT, CFA

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Selecting Strategies and Screening Funds

Once an investor concludes that an allocation to hedge funds is desirable and chooses an approach, the selection of the specific hedge funds to invest in is the logical next step. If working through an investment advisor, the investor should evaluate the advisor's capabilities in the hedge fund space. Specifically:

  • Is there a qualified individual or team that evaluates hedge funds for the financial advisor?
  • What specific issues are assessed in the due diligence process? What is the depth and quality of the assessment?
  • How often is the fund assessed?
  • Has the product been suitably screened following a best practice screening process?
  • What relevant experience does the fund of funds manager have?
  • What other experience, qualifications and registration does the manager have?

If working through a multi-strategy fund, the investors should assess the above but also focus on the manager's ability to allocate across strategies and the idiosyncratic risk of the multi-strategy fund. Operational due diligence is essential as the entire allocation will be in the hands of one firm.

If not working through a fund of funds or advisor, investors should have the necessary skills and experience themselves to allocate among strategies and compute the optimal allocations by strategy and manager.

Determining Appropriate Sub-allocation to Strategies and Managers

Investing in hedge funds requires a diversified and well-constructed portfolio of strategies to ensure ...

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