Hedge Fund Investing

  • Determine the pricing sources
  • Ascertain the frequency of the portfolio being marked to market
  • Understand how volatility is managed
  • Determine the manager’s risk objective
  • Ascertain whether the manager assesses counterparty risk
  • Review the manager’s maximum exposure to any one counterparty
  • Understand diversification percentages and the criteria behind them
  • Determine the average number of positions in the portfolio, including its largest position in any one issuer and in any sector
  • Determine the maximum percentage of the portfolio invested in any one position
  • Determine the manager’s cash positions, minimum and maximum amounts, minimum and maximum percentage of the portfolio and¬†the average position
  • Request detailed information concerning manager’s use of leverage and understand how leverage is calculated (e.g. use of derivative¬†instruments)
  • Determine the maximum amount of leverage employed, the ranges and average leverage used
  • Understand the instruments used for hedging
  • Analyze the liquidity of the portfolio and determine whether there were liquidity problems in the past
  • Determine information available from the manager on an ongoing basis (performance, portfolio of securities) and the frequency that such information will be provided (daily, weekly, monthly)
  • Determine whether information provided by the manager is verified from independent sources (e.g. transparency of portfolio)
  • Review the manager’s use of soft dollars, historical and pro forma
  • Analyze past performance (identify return drivers)
  • Determine investment style (past, present and future)
  • Review assets under management – Determine managers ability to handle continued growth or determine the cause if there was a dramatic decrease in assets