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Alternative Market Briefing

Hedge Fund Information - How much is enough for due diligence?

Friday, March 06, 2009

As investors have realized, in the post-Madoff era, that they can no longer sit on a pile of due diligence papers without reading it, or refrain from asking difficult questions to their hedge fund managers, they have been overly keen on getting as much information as possible. But what is the quantity of information required to conduct good due diligence? Gabriel Kurland, founder of Geneva-based Hedge Fund Appraisal (a provider of due diligence services to hedge fund investors) addressed this issue in his latest newsletter:

The recent events that took place in the hedge fund industry have had a destabilizing effect on some investors’ old habits. A lot of them were taken off guard by “newly discovered” risks linked to hedge fund investments. The common reaction among investors, especially for the least prepared, has been to rethink on a broad base their approach to due diligence.

The first protective step has been for investors to redeem (…) . The following step has been to rush for the information that had been overlooked for so long and which has now become mandatory.

In the pre-BM era, hedge fund investors got a lot of comfort from two due diligence habits: (1) the fat file method; and (2) the don’t know don’t ask method. The first method consists of asking for all the readily-available information that can be obtained from a fund, store it in an impressive big folder on the shelf and to rest on it. The second method relies on the concept that th......................

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