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New Managers July 2014

SCOTSTONE COLUMN: He who pays the piper calls the tune

He who pays the piper calls the tune: Investor due diligence has tightened hedge fund operational controls Ian Hamilton

This column is authored by Ian Hamilton, who is the founder of IDS Group. IDS provides fund administration services in Africa and Europe through Malta. He is also the founder of Scotstone Investments, a company that has fund structures and services for global emerging new managers.

It is not an easy ride for many hedge funds with the new institutional investors now calling the tune.

Investors in the past have unfortunately been sloppy in their due diligence when investing in hedge funds. One has only to see what Madoff was able to get away with and also to look at the institutional names involved in feeder funds into Madoff's fund.

Private investors do not have the resources to do a full due diligence test but there are short check lists that at least reduce much of the work needed. I call my list "Terms of Engagement" and it is the following:

  • The investment manager should be a licenced entity in the jurisdiction they are operating from. Check this out with the relevant authority. Do not rely on the fund managers word and marketing material.
  • The hedge fund should also be a regulated fund; while there are unregulated funds out in the market it is best to avoid them as corporate governance can be poor.
  • Check that there is a clear segregation of assets and bank accounts of the fund from the fund manager.
  • The appointment of a third party administrator and also the regulated oversight of the administrator. Make sure that the administrator is an actual party!
  • The use of a prime broker.
  • Custodian to ensure that the ......................

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    This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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