When choosing a Hedge fund you will have to do the necessary research and combine it with your investment goals. After comparing a specific Hedge fund on performance measurements and its investment strategies, you as an investor will have to perform a due diligence on a Hedge fund or more than just one. The due diligence process takes quantitative and qualitative aspects of the Hedge fund into consideration to give the investor a more defined picture of what will happen with his money and who is handling his future returns.

Quantitative due diligence factors:

Quantitative factors are numerical values that reflect the strategy or more detailed information on the strategies itself. One of the first and most important screening factors with Hedge funds is what type of strategy (or strategies) is the Hedge fund implementing. It is important for the investor to understand the strategy before investing. Warren Buffett:”Never invest in a company you can’t understand”. How long has the Hedge fund implemented this strategy and how is its track record against the competition while using this strategy. The implementation system is also important. The investor needs to know how the Hedge fund will decide if it is the right time to invest or not. Is there certain signals that the fund manager waits for or does the fund manager use a criteria system of evaluation. Risk assessment is crucial for the investor to understand the risk involved with the strategy the Hedge fund is currently executing. This will give the investor insight into if the investment fits in his current portfolio.

Qualitative due diligence factors:

The qualitative factors reflect a certain atmosphere or structure from within a Hedge fund, which is different from each fund in the industry. The factors are more about the firm and the people working for the Hedge fund. Factors like the minimum investment for one fund might be R 250 000, while at another fund it might be R1 000 000. The maximum leverage that the fund uses plays a vital role and important for any investor when considering his/her portfolio. Transparency can be a big factor between the fund manager and the investor to build a long business relationship. Investors will have to know the lock-up period of the Hedge fund (the minimum time that the money has to be invested in the Hedge fund). A crucial factor is the fees. There is a market average of 2% management of the total assets and an average of 20% performance fee on the profits. Some Hedge funds might have their own fee structure and lies dormant until certain circumstances take place. The basic principles of a Hedge fund can give a more personal image of the fund and if it correlates with the investor’s principles of life and investments. An office visit can also give the investor a brief glimpse into the Hedge fund and the structure of management.

Research on the fund manager plays a vital role in the success of the due diligence process for the investor. Background information can be acquired on his education and previous employment. Questions can be asked to the fund manager himself to acquire the precise information and determine if he is open enough with the investor. The investor will try to determine if the fund manager will abide by the prudent man principle in the future and handle the investments as his own money.

The problem with due diligence is that there is not a one size fits all formula to measure all the Hedge funds available at once. The due diligence process will depend on the information given to the investor and his own interpretation of all the data. To reap the awards from a thorough due diligence process, the investor has to understand what he is investing to and needs to have a basic understanding of the investment procedures.

After doing the due diligence, you should have a broad picture of which Hedge fund best suite’s your needs as an investor. They say a picture is worth a thousand words, due diligence is the process of finding the thousand words to the beautiful picture of your future Hedge fund.

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