July 29, 2021

The Hedge Fund Checklist: What To Ask Before Investing

Written by: HUDSONPOINT Team
Hedge Funds, Private Equity



hedge fund checklistHUDSONPOINT|capital has created the ultimate hedge fund checklist outlining what to ask before investing in hedge funds.

Every investment requires a certain amount of due diligence to ensure it’s appropriate for a person’s circumstances. But hedge funds, with their expensive point of entry and alternative strategies, require significant due diligence.

There are many variables at play, such as the target return an investor would find acceptable, the nature of that return, and the risks associated with achieving it. The context and goals of the wider investment portfolio also matter when decided whether a new investment is worthy (or not).

Hedge funds can be an attractive addition to certain portfolios, given that they offer a broad range of diverse strategies that are often less correlated to traditional assets. On the flip side, they are usually more challenging to access and are more complex to understand. The level of required due diligence is much higher for a hedge fund than it may be for other more straightforward assets, such as an index fund or blue-chip stock.

With that in mind, let’s take a look at some fundamental criteria that help identify a worthy hedge fund investment.


Is their strategy appropriate?

Hedge funds often employ a range of alternative strategies to earn active returns on their funds under management. The tools, strategies, and goals of the fund are critical to understanding whether a hedge fund is appropriate or not.

Some funds will carry a strict investment mandate, whereas others will retain the freedom to invest as flexibly as they see fit. Many hedge funds will invest in primarily traditional assets, while others may use complex financial products that are harder to understand, such as derivatives and debt instruments.

Assessing a fund’s stated strategy helps determine what to expect from an investment and how it fits into your personal investment goals. Some strategies, such as market-neutral or long/short, aim to generate returns in all market conditions, offering a hedge to broader bear markets.

Alternatively, other funds may implement strategies that take remarkably leveraged risks using high-frequency quantitative trading or to play mergers and acquisitions, which may be far more volatile yet have more significant potential for returns.


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Does their performance stack up?

While past performance is not a reliable predictor of future performance, it does help highlight the expected return profile and asset correlations that might be experienced in future market conditions. Performance is heavily linked to the strategy employed by the hedge fund and the skill and quality of the fund manager.

It would be hard to be convinced of the investment prospects of a hedge fund that has consistently underperformed its target over many years, just as it would be hard to look past a fund that has outperformed the market over multiple periods.

How did the fund perform when equities declined? How volatile are the returns? The goal of an investment is to deliver a financial return with an acceptable level of risk, so it’s essential to consider the return profile of a prospective hedge fund.


Is the structure of the fund manager appropriate?

The integrity of the hedge fund manager is also a critical component of a fund investment worthiness. Investors are relying on a few key personnel to invest their money on their behalf. The management company should have a trustworthy structure that gives confidence about the operations of the fund as well as the ability to access and recoup your funds invested.

This may be as simple as the mandate of the fund or as complex as internal corporate governance.

Are the managers running free, or do investors have a say in changes to the fund’s strategy? Is there a team in place to identify investment opportunities, and if so, who has the final say? What risks are management policies in place to ensure the continuity of the fund and the management firm behind it?


Are the fees justified?

A considerable determinant of long-term investment performance are the fees charged along the way. All applicable and possible fees should be established before you invest in a hedge fund. The hedge fund universe has not, for the last decade, outperformed the general market, a large part due to excessive fees eating up any outperformance.

The key, therefore, is to identify funds that earn their keep. It may be worth paying significant performance-based fees if the fund is a net positive to your portfolio.

Calculate all the costs associated with an investment, including any buy/sell spread, fixed expenses, and performance-based charges, as well as the conditions required to trigger each one.


Is the fund compliant and tax-savvy?

Just as the structure of the hedge fund and the fund manager is essential, so are their policies for necessary legal compliance and meeting tax obligations. Hedge funds are still heavily regulated in many ways, with much legislation applicable to manage the chances of corporate failure.

A background check on the fund principals or partners is a solid idea to ensure the legal integrity of the fund and minimize the risk of adverse impacts cropping up later down the track. The fund should also have a strategy in place to reduce taxes owed or at least maximize the efficiency of distributions and capital gain recognition to their investors.


Tick all the boxes with help from the experts

There’s a lot to consider in this hedge fund checklist when preparing to invest, and it’s often difficult to conduct proper due diligence with little experience. Fortunately, accessing reputable knowledge is easier than ever before. HUDSONPOINT Capital provides qualified retail investors with a platform of vetted quality hedge funds that you can access as part of your broader financial strategy.

Ready to explore your options for adding Hedge Funds to your portfolio? Book a complimentary consultation with one of our advisors to learn what opportunities are available right now. 



Please note that any investment involves risk including loss of principal. Some risks of investing directly or indirectly in real estate include declining real estate values, changing economic conditions and increasing interest rates.

There can be no assurance that any hedge fund will achieve its investment objectives. There exists a possibility that an investor could suffer a substantial or total loss as a result of an investment. Prospective investors should be aware of the substantial risks of investing in any hedge fund and must, either individually or together with his advisors, have the financial sophistication and expertise to evaluate the merits and risks of investing.

This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.

Securities offered through National Securities Corporation Member FINRA/SIPC

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