Fund of Fund

Fund of Fund Due Diligence

I recently found this fund of fund due diligence article which you might have seen a link to within my hedge fund due diligence guide. Within this article Jim Tomeo, Chief Operating officer and Senior Portfolio Manager of SSARIS Advisors, presents some interesting information regarding hedge funds asset allocation process. He talks a lot about building a portfolio using a bottom up / top down approach and the due diligence that requires. This approach includes taking into consideration two different investment philosophies:

Convergent Strategy – The value of an equity is based on the company’s future expected earnings, future growth rate of these earnings, and uncertainty of these predictions.
Divergent Strategy – Past patterns in security prices can forecast future price patterns.

His process calls for 50% of returns coming from the convergent strategy and 50% coming from the divergent strategy. It also emphasizes the importance of proper pricing on hedge fund success. Another point that Jim stresses within this article is the importance of constantly evaluating hedge fund managers. This means frequent hedge fund manager due diligence:

Reviewing internal structure / procedure
Background checking
Review of hedge fund documentation including memorandums

Jim believes that taking cautions in terms of pricing, manager selections, in addition to sticking with a bottom up and top down approach can help hedge funds endure through tough times and succeed.

Read more articles like this within the Hedge Fund Due Diligence Guide.

- Richard

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