Hedge funds are dynamic investment vehicles designed to perform with low correlation to broad based markets. The higher fees and potential multi-year lock up periods characteristics of hedge fund investing merit disciplined systematic monitoring.
Whether you're an institutional investor or a high-net-worth individual, regularly monitoring hedge fund investment’s performance and operational changes leads to more informed decisions. Here are ten questions hedge fund investment process and business questions to ask when evaluating hedge fund investments.
Hedge Fund Investment Process Questions
Have there been any changes to the fund’s investment strategy or have any new strategies been added?
Managers may shift their strategies to adapt to market conditions. New strategies should encompass the manager’s core expertise or imply increased style shift risk.
What are the current investment themes or topics, and what are the top five positions?
Knowing the fund’s current investment themes or topics, along with consistent portfolio attribution enables a clear picture of where performance is generated and more importantly adherence to a manager’s core investment process.
What is your current market outlook and how will this impact the portfolio?
The manager's current market outlook perspective and how it might affect the portfolio is very useful. If the fund’s performance isn’t aligned with their strategies suitability for the ensuing market condition, this could indicate style drift.
What is the greatest risk to investing in your strategy?
Tail events are inherently unpredictable, but a manager’s insights into potentially significant risks to their strategy reveals investment process robustness and portfolio suitability.
Hedge Fund Business Questions
Have there been any changes to the ownership or corporate structure of the firm?
Shifts in the ownership or corporate structure of the firm affect business stability. These changes can significantly impact the fund's direction, potential business continuity and may foreshadow change in control events. A manager must clearly articulate such modifications and what implications they might have for investors.
What is the firm’s headcount and what is the number of investment professionals?
The number of professionals managing your fund and turnover is a direct indicator of the firm’s work environment/stability and the capacity to handle your investments effectively. This is particularly relevant for the number investment professionals. For example, a fundamental long short strategy, with a broad equity investment universe, and only one portfolio manager and two analysts might be challenged in both capacity and capability to succinctly analyze their investments universe.
Have there been any legal actions involving the manager or fund?
Legal issues may indicate red flags for the business. This information can provide insights into potential risks associated with the fund stability, business continuity and portfolio liquidity going forward.
Have there been any changes to the external service providers (e.g., administrator, auditor, custodian, prime broker, legal counsel)?
The quality of service providers like administrators, auditors, and custodians impacts the fund’s operational efficiency. Changes to these external service providers and the reasons behind such changes should be addressed to gauge business stability.
Have there been any changes to counterparties, operations, pricing, trading processes, IT infrastructure, compliance, or other processes?
A manager’s operational processes like IT infrastructure, trading processes, and compliance operational indicate business capability and stability. This is particularly valuable to assess any changes to the portfolio pricing process or evolutions keeping pace with advancing technology.
What are the current assets under management, and are there any expected inflows or outflows?
A manager’s current assets under management and any expected inflows or outflows gauge the fund's growth or contraction. This is relevant for both business stability and a metric for monitoring potential diluted performance due to strategy scalability constraints.
Conclusion
Regular active monitoring helps maintain a clear and up-to-date understanding of hedge fund investments, enabling you to make informed decisions that align with your financial goals.
Resonanz Capital works with the best hedge fund professionals available. We have a proven track record of successfully handling complex strategies. Our experienced hedge fund management process has produced substantial capital gains with low market dependence, while outperforming peers.
Contact us today, as we guide you towards generating value through hedge fund investments.
