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Do Diligence

I agree with Paul Wilmott’s latest blog: “For several years now I have been advising that potential investors in funds really need to take their due diligence far more seriously than they do at the moment.”

I’m involved in risk management at a fund of funds and this is the part we take most seriously. Once you’ve put clients’ money into a hedge fund, you’re stuck for a while. We don’t do overlays, and anyhow, it’s hard to do an overlay on a fund that itself is trading dynamically. So you have to live with what you’ve done. Allocation is relatively irreversible and therefore the most critical part of the whole investment process, and so we put our major effort into deciding (a) which strategies as a class hold promise, and then (b) very careful due diligence in terms of the managers, their explanation of their strategies, their operational setup and their risk management. I don’t know if I believe in psychometric testing — I think there’s too much of this around — but I do pay attention to my intuition about managers.

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