The Little Book of Hedge Funds

Appendix

Due Diligence Questionnaire

I. Scope (what to assess)

A. Firm

1. Firm ownership.

2. Portfolio manager’s investment in fund (i.e., does he have his own skin in the game?).

3. Registrations with domestic and international regulatory agencies.

4. History of legal/regulatory actions against firm or key people—conduct background checks.

5. Firm-wide AUM history and composition.

6. Overall staffing adequacy and turnover history.

7. Employees related to each other or to employees of service providers.

B. Fund

1. Redemption terms (i.e., when an investor can get his money back).

2. Monthly net assets history.

3. Any NAV or performance restatements.

4. Investor concentrations.

5. Caliber of auditor, any qualifications or unusual notes in audit—visit and perform due diligence on any unknown auditors.

6. Independence and quality of offshore fund’s board of directors.

7. Quality of fund’s documents and caliber of law firm that drafted them.

8. Fund structure and any potential for cross-share class liability (i.e. if the liabilities of one share class exceed its assets, are investors in other share classes on the hook for the deficit?).

C. Operations

1. Qualifications of middle (e.g., COO) and back office (e.g., CFO) staff.

2. Segregation of duties between front office (trading and research) versus middle office (trade processing) and back office (accounting).

3. Any outsourcing of the mid-back office.

4. Front, mid, and back office systems, and access restrictions placed on ...