© 2009 Corgentum Consulting, LLC
Thinking outside the box-
Seven innovative due diligence techniques
The nature of due diligence is changing. The drivers of this change are manifold ranging from
the Madoff scandal and current Ponzimonium to recent initiatives by the G-20 and the
United States Securities and Exchange Commission to more closely regulate hedge funds.
According to Corgentum’s research in the pre-Madoff environment approximately 85% of the
operational (i.e. – non-investment related) data collected by large hedge fund allocators
during the due diligence process was very similar. Clearly this herd due diligence mentality
was flawed and did not focus on the enough of the right red flag issues. In order to perform
effective due diligence in this new environment investors both large and small need to
become creative in redesigning their approach to due diligence. Here are some techniques
which may prove beneficial in the new environment:
Talk to your friends
Turn your contact list into a red flag social network. When looking at a hedge fund manager
for the first time, others may have looked at the same hedge fund previously and
can provide insight including reasons they may not invested or redeemed.
Pick up the phone
If a manager says they work with a certain counterparty of service provider do not just
confirm relationship but try to have a conversation with the other party. It is often very
informative and provides a different perspective than the HF manager will give you.
Make you presence
Let the hedge fund manager know that you will be performing on-going monitoring including
conference calls, focused reviews and on-site visits if they want to keep your money.
Investors must walk a fine (but necessary) line between being overbearing and pushing for
Design a due
Investors should have an approximate due