Now more than ever, there is an increased awareness of the importance of due diligence in the hedge fund community. While there are many different levels of due diligence (investment and risk management, investigative, operational etc.), at minimum a preliminary background check should be performed prior to making any allocations to a hedge fund.
What does a preliminary background check consist of? Generally speaking, before making an investment the following basic steps should be taken:
- Check the formation, existence and good standing of the fund and affiliated entities.
- Perform a critical review of securities law filings. Confirm that filings have been properly made – 13F, 13D, 13G, Form 3, Form 4, Form 5 etc.
- Conduct public record research for any bankruptcies, judgments/tax liens, UCC filings, legal civil and criminal records.
- Review regulatory records or disciplinary issues disclosed with the NFA, FINRA, SEC, FSA, etc.
- Run a name search on the fund, associated entities and key individuals against Anti-Money Laundering Watch Lists for any matches and suspicious activity highlighted.
- Look through news articles and media sources for any information that may not have been disclosed or uncovered during a formal search of public record filings (i.e. any legal implications pending, resolved or dismissed prior to the filing of a formal court action, additional information on the key individuals that was not included in the biographical histories provided, reports that contradict or call into question character or motives etc.).
- Verify previous employments and educational histories. Confirm work and attendance dates , positions held and degrees awarded, check for any time gaps that stand out or appear to contradict the time line of other information on record.
- Contact service providers disclosed to validate their relationship to the fund, insofar as is possible.
Before considering any investments, ask if you are comfortable with the level of due diligence that has been conducted. If not, you may want to critically review the procedures you have in place, the files you have on record and how you can better attempt to protect any against any potential risk or fraud.