ABC Quant Blog: Due Diligence on Hedge Fund Managrs

The methodology of due diligence on hedge funds presents a controversial topic, mostly because of a strong qualitative bias of traditional institutional investors. Such a  bias leads to ignoring or underestimating most investment risks that have to be quantified. Our standpoint on due diligence could be summarized as follows...

A sophisticated hedge fund due diligence framework should assess all applicable risks – not only their non-quantifiable segment. Our proprietary due diligence routine includes evaluation of the complete range of risk categories: Market, Liquidity, Volatility, Concentration, Strategy, Currency, Operational, Legal and Fraud risks.

Although institutions have been conducting due diligence on investment managers for years, their routine protocols mainly focus on the qualitative side. Thus, the main drawback of commonly used due diligence frameworks is a lack of the quantitative component, arguably most important.