6 QUESTIONSInvestors Should Ask Themselves Before Investing in a Hedge Fund

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1. DO I UNDERSTAND THE RISKS?

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Be well aware of the risks involved.- Each fund has different risk profiles.- Investments with the highest potential returns are usually those that have the most risk.

Know your risk/return profile, or how much you’re willing to risk losing to potentially reap outsized gains. Understanding that you may lose most or all of your investment is a key emotional and mental consideration.

Important to understand that returns are not guaranteed.

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2. HOW ARE HEDGE FUND FEES STRUCTURED?

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Hedge fund fees can range from simple to complex.

Investors should understand if there is a hurdle rate. What are the redemption terms? Subtleties in fee terms can mean significant difference in capital.

In general, the more aligned the hedge fund terms are with the interests of its underlying investors, the better for each party.

Standard hedge fund fee structure is a 2/20 model, where the asset management fee is 2% and the carried interest, or performance fee, is 20% of investment profits.

HEDGEFUNDFEES

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3. HOW ARE THE ASSETS VALUED?

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Some hedge funds may hold assets that are

illiquid.

As a result, the underlying assets may be difficult to value since unlike stocks and bonds, they do not have a widely available daily opening and

closing price.

It is critical to understand that there is some gray area to

valuation in funds that participate in illiquid assets.

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4. HAVE I RESEARCHED THE MANAGER AND FIRM?

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1. Investors should do extensive research on the hedge fund manager and firm.

2. Are there any SEC violations or pending infractions? A good resource is FINRA’s broker check for a quick search on the manager. Understanding the manager/firm’s track record is important.

3. Is the fund an emerging manager with little track record, or an established industry veteran? There are pros and cons to both.

4. An investor should completely understand the stakeholders involved, and should adjust their expectations accordingly.

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5. DO I UNDERSTAND THE STRATEGICTHESIS OF THE FUND?

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• Investors may not understand the algorithms behind a systematic trading hedge fund opportunity.

• However, they should have an understanding of how these funds generally behave. Leave the fund management to professionals and quant trading to computers.

• Your job as an investor is to be well informed and aware of the tendencies and trading characteristics that are inherently behind different hedge fund strategies.

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6. AM I FAMILIAR WITH THE DUE DILIGENCE PROCESS?

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• Industry standard due-diligence questionnaire provided by the Alternative Investment Management Association. Investors should read this over thoroughly.

• Additionally, they should vet the brokerage firm and other third party fund administrators that the hedge fund is working with in order to understand whether or not the fund is engaging with top-notch industry professionals.

• The manager should be willing to meet face-to-face, or to at least find some phone time to discuss track record, strategy, and how the fund is differentiated.

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CONCLUSION

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This only touches the surface of more detailed questions that should be asked related to specific due-diligence. The 6 questions should be qualified as a general roadmap to begin the initial investment discovery process. There is also no single correct formula for deciding on a hedge fund investment.

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YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS FORUM WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. You understand that you are using any and all Information available on or through this website AT YOUR OWN RISK.

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