Fund of hedge funds series, part 2: thorough due diligence, ensuring the best hedge fund selections
From my experience, thorough due diligence is crucial when selecting hedge funds for your portfolio. Evaluate the track record, strategy, risk management practices, and performance consistency of each fund.
From my experience, thorough due diligence is crucial when selecting hedge funds for your portfolio. Evaluate the track record, strategy, risk management practices, and performance consistency of each fund. Avoid managers with unclear strategies or those who fail to provide comprehensive information.
Focus on a fund's track record over at least five years to see performance under different market conditions. Aim for funds with consistent annual returns between 8-12%. Understand the fund's strategy, whether it’s long-short equity or global macro, to align with your investment goals. Consistent performance is vital—steady returns of 8-10% are more attractive than occasional 20% returns followed by losses.
Don't get dazzled by high returns in one or two years. Look beyond short-term performance. A fund with strong, steady returns over five years is generally more reliable.
Operational due diligence is also critical. Evaluate the fund’s compliance, reporting accuracy, and internal controls. Ensure regular audits by reputable firms and strong cybersecurity measures. Transparency is key; avoid managers who are not clear about their strategies.
In summary, thorough due diligence, covering investment and operational aspects, is essential for building a resilient and high-performing portfolio.
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Eighteen years in investment management, M&A and financial technology. A CFA Charterholder, he leads investment analysis, valuation and fund structuring across Significa's advisory and investment practices, and teaches valuation and fund structures in the CVC Builder curriculum. Concurrently Chief M&A and Growth Officer at AlternativeSoft in London; co-founder of MarkeScope, which developed the first stock-screening solution to incorporate risk measures. Treasurer of CFA Society Egypt; BSc Electrical, Electronics and Communications Engineering, Cairo University.