Hedge Fund Investment Due Diligence Checklist

Due diligence is required of any responsible investor seeking to share in the gains (or losses) of the hedge fund of their choosing. Our checklist is comprised of basic questions you'll need to be answered before investing in a fund.

Hedge Fund Investment Due Diligence Template

Investing in a hedge fund is obviously a significant and consequential decision for anyone. Trying to manage and understand the complexities of a modern investment vehicle is equally significant. Due diligence is required of any responsible investor seeking to share in the gains (or losses) of the hedge fund of their choosing. Below you’ll find a checklist of the basic questions you’ll need to have answered before entrusting a fund with your money.

Keep in mind that these questions are suited for the preliminary stages of investing in a hedge fund. If you get any answers that are not complete or not to your liking you may wish to follow up and ask further questions. Additionally, the unique structures and strategies of some funds may make different questions appropriate, depending on the circumstances. All investors should use their informed judgment and, if in doubt, consult experienced counsel.

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Hedge Fund Investment Due Diligence Template

Hedge Fund Investment Due Diligence Checklist

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Due Diligence

Hedge Fund Investment Due Diligence Template

What Tasks does the

Hedge Fund Investment Due Diligence Checklist

Include

Strategy

Any inquiries about a hedge fund should begin with the strategy of the fund itself. What investments does the fund make? Why does it make them? Where in the world does it invest?

A strategy is a nebulous topic that encompasses a myriad of other issues. From investment types and locations to attitudes and behaviors regarding leverage, the aim of this part is to gather a birds-eye view of the hedge fund’s structure and goals.

What is the overall strategy of the investment fund?
What are the key objectives of the investment fund?
How does the fund plan to meet those objectives, in the short and long term?
What are the fund’s leverage limits (with respect to the investment vehicle itself) and how heavily is it currently leveraged?
What is the fund’s strategy with respect to asset-level debt?

Structure

Structure refers to the people making decisions, both behind the scenes and in the front office. It includes both the individuals themselves and the hierarchy and systems in which they operate.

What level of investor approval is required to make changes to the hedge fund’s strategies?
Who is responsible for asset-level decisions? What approvals do they require?
Who discovers and sources investment opportunities?
How are risk management strategies integrated with the activities of the decision-makers?

Fees

All fees and expenses should be determined up-front. As investment fees can create a significant drag on hedge fund returns, sometimes wiping out the index-adjusted returns of the investment altogether, all fees should be itemized and noted.

What are the investment vehicle formation fees anticipated to be?
What are the fund management fees?
What services are performed in exchange for fund management fees?

Compliance

A hedge fund is required to comply with a myriad of laws and regulations. How it ensures that its operations are in compliance with legislation should be of utmost concern to the potential investor. Similarly, information regarding the history of the fund itself, and any of its principals, is vital to guarantee the integrity of the investment.

Is the fund facing any current or reasonably foreseeable criminal or civil proceedings of any kind?
Was the fund, or any of its principals, ever subject to a legal, regulatory, or civil judgment or negative ruling or order?
Are any of the general or limited partners facing any current or reasonably foreseeable criminal or civil proceedings of any kind?
Describe the hedge fund’s approach to regulatory and legal compliance. How is it integrated into the firm’s general operations?

Tax

Taxes can cut into investment returns in a big way. Ignore them at your peril. Whether you’re investing with a tax-exempt account or are fully taxable, you’ll want to make sure that the hedge fund is doing everything it can to shield your income from federal and state taxes.

What strategies does the fund use to shield taxable clients from taxation on investment gains?
What strategies does the fund use to shield investors using tax-exempt accounts from the Unrelated Business Taxable Income provision, or other provisions that attempt to make otherwise non-taxable investment income taxable?
Does the fund make use of any novel or unusual taxation structures or strategies that could reasonably be thought to attract the attention of the tax authority?

Miscellaneous Items

Private Placement Memorandum (PPM) Review

The private placement memorandum (PPM) is similar in many respects to a prospectus. It details the nature of the investments being offered and the risks inherent therein. The exact contents of the PPM will vary depending on what legislation governs the offered securities, but the document should always include information that is useful to the investor. All potential investors should take a close look at the PPM to ensure the hedge fund meets their requirements. Some examples of items to look out for in a PPM include:

What are the risks of the portfolio?
What is the fund’s derivative strategy and how much exposure does the fund have?
What is the average turnover rate for assets owned by the fund? What is your asset churn rate?

Personnel/Biographical Details

The CV’s and brief biographies of all of the firm’s principals and decision-makers should be requested. While the professional histories of the people involved in the fund may be of no moment to you, red flags can appear in the biographies of some people. Limited experience or frequent, short stints with disreputable firms may dissuade you from dealing with a particular hedge fund.

Are any of the fund’s decision-makers both: inexperienced, and relatively unsupervised?
Do any of the fund’s decision-makers have a significant history of either: disreputable employers, or short periods of employment?

FAQ

What Is Due Diligence?

Due diligence is a critical aspect of any deal that begins very early in the process and can continue right up until closing. During due diligence, the potential buyer asks questions and requests documentation from the seller that helps the buyer understand the target company and its business. These requests are usually general to start and become more specific as the buyer develops a greater understanding of the target. Buyers use the information provided by the seller to evaluate the opportunities and risks associated with the potential transaction. It is important for sellers to stay organized throughout the process. Buyers often submit thorough, detailed request lists that require input from numerous members of the seller’s deal team.

What is a due diligence checklist?

As the name implies, a due diligence request list is a list of questions and requests for information and documentation that a buyer submits to a seller in order to learn about the target company, its business and its operations. The initial diligence request list tends to be broad and typically includes an extensive list of questions covering a wide range of subjects. This allows the buyer to gain a broad understanding of the target company and identify key issues that can be investigated and considered more closely. Because every deal is different, due diligence request lists have to be tailored to meet the needs of the buyer and address the unique circumstances of your transaction.
However, there is a variety of fundamental requests that are relevant in most deals. These are the types of requests that our templates are designed to address.

What Questions Does the Master Due Diligence Questionnaire Include?

Key considerations when using our m&a due diligence template

Our templates are drafted to provide an inclusive and wide-ranging list of initial due diligence requests. However, the templates, as well as the information contained therein, are not legal advice. They are not complete, and they are not specific to your transaction. The templates are designed to elicit general information from the seller that will provide the buyer with a broad overview of the target and it’s business and operations. You should review any template before using it, and it may need to be modified to ensure that it is suitable and relevant to your circumstances. Information provided by the seller will likely trigger additional questions that focus on specific aspects of the target’s business and issues identified during the due diligence process.

Are the requests in the template comprehensive?

No. Our Due Diligence Checklist is drafted to include typical requests that are relevant in most transactions. However, every deal and every target company is unique. Before utilizing any template, it is important that you review it with the help of your legal and other professional advisors to ensure that the requests are complete and tailored to the specific circumstances of your deal.

How to use the template with Dealroom

Start 14-day Free Trial of DealRoom and sign-up
Select a Master Due Diligence Template while creating a new room
Start assigning, adding to, and completing due diligence requests with needed documents by uploading them into the built-in virtual data room. The Requests tab is automatically populated with the requests from the due diligence template.

Can I change requests in this checklist or add new?

Every M&A process is different. Downloaders are urged to make these checklists their own by changing the providing information to better fit their needs.

Does this questionnaire provide all the necessary integration information?

This checklist was created by and for M&A professionals. It includes a comprehensive starting point for the integration process. However, every deal is different and may require additional requirements and tasks.

How to use this template with DealRoom?

Start 14-day Free Trial of DealRoom and sign-up
Select an Integration Template while creating a new workspace
Start planning, assigning, adding to, and completing integration tasks. The Requests tab is automatically populated with the tasks from the integration template.

Key considerations when using our m&a due diligence template

Are the requests in the template comprehensive?

How to use the template with Dealroom

Start 14-day Free Trial of DealRoom and sign-up
Select a Master Due Diligence Template while creating a new room
Start assigning, adding to, and completing due diligence requests with needed documents by uploading them into the built-in virtual data room. The Requests tab is automatically populated with the requests from the due diligence template.