Many hedge fund investors including high-net-worth individuals, pension funds, family
offices, endowments and foundations, often do not have the requisite expertise or resources
necessary to perform their own due diligence. This is one of the reasons they rely on financial
advisors, hedge fund consultants and professional hedge fund allocators, such as funds of
hedge funds. With the recent flurry of hedge fund Ponzi schemes allegedly perpetrated by
money managers such as Bernard Madoff and Arthur Nadel, it is now more important than ever
for investors to be able to evaluate the quality of the due diligence being performed by their
advisors. How is an investor supposed to objectively and independently evaluate the quality
and effectiveness of the due diligence performed on their behalf?
Ū 1. Appropriate Resources – Are sufficient resources (i.e., staffing levels, budget, etc.)
committed to due diligence as compared to other functions such as client service
or investment management?
Ū 2. Intensity – What exactly does your advisor’s due diligence process entail
(i.e., documentation collection, on-site visits, etc.)?
Ū 3. Documentation – How does your advisor document the due diligence process?
Ū 4. Scope – Is separate operational due diligence performed on operational risk, or is all
due diligence – investment and operational – lumped together?
Ū 5. Qualifications – What makes the individuals performing due diligence particularly suited
to vet a hedge fund’s investment and/or operational risks?
Ū 6. Diverse Skill Sets – Is there diversity of skill sets among due diligence analysts to
ensure a variety of risks are vetted, or do they all have the same general background
(i.e., all former hedge fund accountants)?
Ū 7. On-Going Monitoring – After the initial due diligence process is complete, does your
advisor perform any on-going due diligence?
Ū 8. In-house or Outsourced – Does your advisor outsource any part of the due diligence process,
such as background investigations, to