Jan

31

Review Your Hedge Fund’s Advisor Agreements

January 31, 2005 | Leave a Comment

After revewing a number of fraud cases involving hedge funds, I noticed an area of concern that will be added to our due diligence program. In several instances three of more individuals get together to launch a hedge fund. Usually there are two individuals with world class marketing skills on a cap raising tour touting some bullet proof investment philosophy and a third individual who acts as the advisor, either through an unaffiliated company or within the hedge fund.   

If the investment manager is an outside entity, careful attention must be paid to whether YOUR General Partners have a grasp as well as an understanding of what is occuring in that account. In several instances I noted general partners who have invested their own money in their hedge funds wire their money as well as their investors’ money to an account managed by a third party and giving up management discretion to those funds. The third party being the individual who has the bullet proof investment philosophy.   

One must understand how the general partner’s are valuing the managed account as well as how much independent information they are receiving. In some cases, the investment advisor was simply supplying fraudulent reports to the general partner of the hedge fund and were unable to uncover the advisor’s fraud for months or even years.   

Of course, a solid due diligence program with an operational review would give you the insight needed to make an informed investment decision. You may not even know that the people you are meeting are not actually in charge of that investment philosophy but are actually giving management discretion to the people who actually ARE in charge of the fund’s assets.   

Binish Bulsara 


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