Lessons Learned in Manager Due Diligence Post Crisis, Post Madoff

Although all investors now have a greater awareness of the need for a stronger due diligence process, it can be difficult to determine the best structure to put in place for thorough risk analysis, as discussed in this 2011 FOX Fall Forum session.

• If there is a silver lining in the Madoff scandal, it is a greater appreciation for fraud and co-investor risks, and the need not only to perform the proper due diligence prior to an investment but also to carefully monitor a manager’s performance. 
• Investment due diligence includes multiple face-to-face meetings and calls, conversations with other family offices, a careful reading of current and past investor reports and newsletters, understanding a fund’s leverage and the valuation methods used for illiquid positions, and understanding the sources of return. 
• Operational due diligence includes background checks, a review of fund audits, understanding the investor base and the personal investment of the portfolio manager, understanding the life cycle of the fund and its targeted size, understanding seed investor terms, and evaluating the fee structure to determine the portfolio manager alignment of interest and the appropriateness for the investment strategy.