The hedge fund industry has made a great deal of progress over the past 20 or so years, says Chris Addy, president and CEO of Castle Hall Alternatives. He made the remarks at an AIMA Canada event in Toronto today.
“When I first encountered a hedge fund in 1994…it was opaque and difficult to understand, and oftentimes had poor risk management and poor operational management.”
The industry now is far more transparent. “And it’s relatively rare that you complete operational due diligence on a manager either here in Canada or anywhere in the world, where there’s just such a blatant howler of an operational deficiency that you can almost get up and go home after 10 minutes.”
Addy, a due diligence specialist, says there are still red flags to watch out for when evaluating a fund. Two of the most important:
- conflicts of interest, especially when they are not properly disclosed; and
- poor valuation procedures, particularly where you’re dealing with illiquid assets.
Ranjan Bhaduri, chief research officer at Sigma Analysis & Management, warns against one-dimensional approaches to risk assessment.
“There’s not one statistical metric that tells the whole story. The group that’s doing the due diligence, monitoring and investing really needs to be invoking a whole toolbox of statistical techniques. Then, their experience helps them recognize which statistical techniques to emphasize.”