Due diligence on an alternative investment fund or manager to identify legal and regulatory risk issues is critical to making well-informed investment decisions.
By alternative investment funds, I’m referring to things like hedge funds, private equity funds, real estate and commodities funds.
Here are eight reasons why this due diligence is so important:
- Legal and regulatory issues associated with an investment fund or manager can sink an investment.
- Legal and regulatory due diligence can reveal something on the background of the folks who will be managing your money or your client’s money — and that really matters.
- Uncovering legal and regulatory issues associated with a manager or investment can strengthen an investor’s bargaining position if they decide to move forward with an investment.
- Legal and regulatory issues associated with a manager of a fund have a way of winding up as news stories – we call that “headline risk” and that’s not fun for any investor or adviser.
- Once an alternative fund investment is made and problems emerge, investor money can be stuck in a fund longer than an investor anticipates when it comes to things like hedge funds. Doing the due diligence work before an investment is made to anticipate problems and address them pre-investment is therefore important.
- Mangers that knowingly make false statements in their registration statements that they file with the SEC can be held liable. Due diligence on these regulatory documents is an excellent way to cross check the veracity of certain information in a fund’s selling documents.
- Conducting legal and regulatory due diligence on a fund and manager both before and after an investment is made can help address fiduciary duties that investment professionals may owe to their clients.
- The last place you want to be stuck in is in a herd of investors stampeding out the door if some material issue emerges that could have been flagged prior to an investment being made. That’s when things like gates start kicking in with hedge funds.