Chapter 6

Dedicated to Due Diligence

It is the studying that you do after your school days that really counts. Otherwise, you know only that which everyone else knows.

—Henry Doherty

(This chapter was written by Gregory Schink, a wealth management professional who helped lead the efforts to create the CHP Designation Level 2 Program on due diligence.)

From the late 1990s through the third quarter of 2007, investors felt an overwhelming confidence in the validity of the investments they were selecting, and more especially the managers who ran them. Bernard L. Madoff Investment Securities had been brought up to the SEC for possible violations since as early as 1999. The SEC was alerted to possible fraud concerning Sir Allen Stanford as early as 2002. The credit crunch of 2007 was what finally brought these frauds to light.

The possibility of fraud going undetected on such a massive scale has caused a revolution in how in-depth due diligence will go when investigating a hedge fund and its manager(s) for potential investors. The days of run-and-gun investing when investors were chasing the highest returns possible (think Long Term Capital Management) are gone. Hedge funds must be crystal clear on their backgrounds, the processes they use, and the style they intend to implement. This is helping bring hedge funds more into the mainstream and change the public's opinion of how secretive they have appeared in the past, as well as making quality due diligence a must for high net worth ...

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