Written guidelines needed for hedge fund managers

Date: Thursday, October 18, 2012
Author: Fiona Collie, Investment Executive

It’s important to ask managers the right questions about what is going on with the firm and its day-to-day operations.

When considering hedge fund managers more emphasis needs to be placed on due diligence and getting everything in writing, according to experts speaking at an event hosted by CIBC Mellon in Toronto on Wednesday.

"The industry offers tremendous opportunity to those who are willing to take the time and do their investment research and to get to know the managers and take a good view of where they want to put their money," said Kenneth Phillips, chief executive officer of HedgeMark International LLC, with headquarters in New York and one of the speakers at the discussion directed towards institutional investors. What needs to change, according to Phillips, and what is, in some cases, already happening is the need for the hedge fund world to "get back to basics" and create written guidelines for managers.

"You still need to start bringing back your alternative investments into some form of structure that resembles a fiduciary level of care, a level of care which relates to accountability" he said. "So even if you don't know what your managers are doing, you do know how they're doing it and, most important, you're able to evaluate whether they're doing it well."

A large part of that research and getting to know the manager rests with operational due diligence, according to Toronto-based Esther Zurba, director, Castle Hall Alternatives Inc. At the event, Zurba emphasized the importance of asking managers the right questions about what is going on with the firm and its day-to-day operations.

Operational due diligence needs to be constant, Zurba says, to ensure the fund can meet with any and all changes, such as in management, accounts or regulations. Zurba offers these three "vitamin Cs" to ensure proper operational due diligence:

Conversation: it's important to maintain an open conversation with the manager to make sure he or she is able to meet any possible changes in accounts or regulation.

Confidence: you must feel confident in asking the manager tough questions and saying either "yes" or "no" when necessary.

Comfort: you need to define your comfort level with investing. You need to be clear about what are your deal breakers.

Following these rules will help you find a manager who has both positive returns and proper business structure. "This is something that can really help us identify who are the managers," says Zurba, "that have the top tier infrastructures in place that execute on their strategy models and do so in a way that is palatable to an institutional mandate."