Hedge Fund Due Diligence

Abstract

This chapter provides an overview of hedge fund due diligence challenges facing investors with a specific focus on the operational due diligence process. Operational due diligence is the process of evaluating the operational risks in place at a hedge fund. In recent years, due to a series of hedge fund failures and frauds, operational risks have become increasingly important. Risk mitigation techniques include information technology infrastructure; evaluations by the board of directors; business continuity planning; hedge fund service provider assessment, valuation, and fund operations; and back-office procedures. Another component of the operational due diligence process involves performing background investigations on key personnel. By seeking to evaluate these types of operational risk, investors can better diagnose and avoid losses from these hedge fund operational failures and outright fraud.