Putting together a hedge fund due diligence questionnaire

IMDDA hosted a webinar “Case Studies of Hedge Fund Failures and Lessons to be Learned which is available to listen to in full now. Our guest Rajiv Jaitly leveraged his experiences from high profile case studies and 18+ years of specialist experience in hedge fund investigations to reveal how he’d structure a hedge fund operational due diligence investigation.


Here are a few pointers for putting together a hedge fund due diligence questionnaire:

Be Specific

If you ask a fund manager whether they’ve ever been involved in a hedge fund failure in a hedge fund due diligence questionnaire, they’ll probably say no. What you need to do is ask more specific questions to uncover the kind of behaviors that can lead to failures or blow ups.

Ask things like “have you ever had a lender have to exercise their security?” or “have you ever operated outside your stated volatility range?” These sorts of specific questions are more likely to reveal useful information as they are not open to any kind of subjective interpretation of their meaning, i.e. our definition of what constitutes a failure.

Check The Environment & Culture

It is not enough just to verify policies and procedure, you need to look at the working environment and organizational culture for signs that this could be the kind of operation where things can be hidden. In Jaitly’s experience, most of the issues that lead to hedge fund collapse are identifiable prior to investment, if the operational due diligence professional is prepared to ask the right questions.

You might ask questions around how the work is actually done, by whom and what the priorities and attitudes of those actors are when undertaking the different tasks. This can form the basis for further on site investigations.

Vet Suppliers Thoroughly

This sounds like an obvious one, but it needs to be done in your hedge fund due diligence questionnaire, particularly for hedge funds as there is such a heavy reliance on third party outsourced services. Even at a very basic level you need to do standard hygiene checks to make sure that all the suppliers used are actually who they say they are. Another good question to put in is whether suppliers are required to flag events or anomalies that may lead to failures.

Verify The Approach To Risk

Understanding a hedge fund’s approach to risk and seeing how that compares with your own organization’s risk tolerance is a great way to assess your compatibility. If their appetite for risk far outstrips your tolerance for it, you know that you have a potential issue.

Work With Investment Due Diligence

A hedge fund ought to have a deep understanding of all the markets where it has significant exposure. You may not be able to verify this yourself, but you can work collaboratively with your investment due diligence counterpart to formulate the right questions to reveal this.

This same collaborative approach can be used to check against overexposure to particular markets, style drift and understanding the nature of counterparty relationships, all of which can be indicators of higher risk investments.

Want to know more about current thinking in hedge fund operational due diligence? The full webinar recording is available below, complete with details of three high profile hedge fund failures and the lessons learned from each.

Access our webinar recording on Hedge Fund Operational Due Diligence