High Net Worth Investors

Due Diligence For High Net Worth Investors

I just found a resource on conducting hedge fund due diligence for high net worth portfolios. It is not a complete guide to conducting this type of due diligence but I think they brought up many good points within this article. A hedge fund investment should be utilized to improve the efficient frontier of an accredited investor’s portfolio and protect against downside risk by the allocation of a segment of the portfolio appropriate to the client’s risk tolerance. Both quantitative and qualitative due diligence are essential to protect a client’s investment against fraud, divergence from stated strategy, and/or poor investing.

A fund of hedge funds investment can offer diversification, and innate due diligence, within the hedge fund investment by limiting the allocation that any single fund can hold. A fund of funds downside comes from the layering of fees and the more apparent lack of transparency that’s prevalent with many funds. In addition, the preeminent hedge funds are often hard to locate because they are often available by referral only.

The correlation of a hedge fund with traditional benchmarks is a vital component in due diligence. One must also be aware that although stated pre-tax returns of a fund may be appealing, short-term trading can destroy the tax efficiency which is critical to high net worth investors. Research into the operation of the hedge fund manager and their performance in varying markets and well as tactical ongoing analysis of the fund’s performance are imperative to quality due diligence.

- Gregory Schink & Richard Wilson

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