One of the goals of due diligence is to avoid investing in
underlying hedge fund frauds or failures. There is no precise
definition of what is to be included in hedge fund due
diligence and no international regulatory standard exists to
specifically address due diligence or the selection of
underlying hedge fund managers.
The due diligence process can vary depending on the style of
the underlying hedge funds and the process can be split into
two time frames: prior to investing (ie during the selection
process); and ongoing monitoring (ie after initial investment,
during the investment period). The due diligence process during
these time frames should be a combination of both quantitative
and qualitative criteria.
It is essential that once an investment is made into an
underlying hedge fund it is regularly monitored to capture any
investment style drift, changes in the risk profile; changes in
key management personnel and...