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Alternative Market Briefing

The evolution of due diligence, Part 3 – Valuations policies still vary greatly and ‘investors should take nothing for granted’

Friday, November 20, 2009

Kirsten Bischoff, Opalesque New York:

Some funds of hedge funds (FoHFs) and due diligence (DD) providers have had to review their methodology since the beginning of the credit crunch and the subsequent uncovering of frauds such as Maddof’s. Opalesque spoke to several industry players about their approach. Our conversations are presented in a Q&A format – as are DD forms.

The events of 2008 and 2009 served to bolster the risks that many due diligence firms have warned about in the past. Many of the due diligence managers we spoke with cited investor concern over fraud as one of the drivers behind new business. However, they also cautioned investors not to lose sight of many other risks (not to ‘fight the last battle’ as one manager put it) and expressed ongoing concern with valuations processes, liquidity risks, and counterparty risks. They also stressed the importance of ongoing due diligence. One manager pointed out many hedge funds look very different in 2009 than they did in 2008 and solid, ongoing due diligence processes provide insight to some of the more intangible risks that exist – such as the way managers react during times of crisis.

Christopher Addy is President and CEO of Montreal-based, operational risk consultancy Castle Hall Alternatives. Addy also authors the blog “Risk without Reward”......................

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