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November 8, 2005
Funds of hedge funds enhance due diligence procedures
Funds of hedge funds are beefing up due diligence procedures, reacting to the scandal around the collapses of Bayou Management and Wood River Capital Management, reports AIN sister publication Compliance Reporter. The firms increasingly use third parties to screen backgrounds of the personnel, said George Mazin, partner at Dechert in New York. Mazin said funds of hedge funds are probing more carefully by, for example, verifying valuations.
Funds of hedge funds owe a fiduciary duty to investors to carry out due diligence and the obligation heightens if it is a registered investment adviser. George Zornada, partner at Kirkpatrick & Lockhart Nicholson Graham in Boston, said his firm recommends visiting the manager's administrator on site.
Rules, however, do not specify what due diligence procedures should entail. Some are adding outside auditor verification to check whether the financial statements the auditor has are the same as those the hedge fund manager gives them.
The Securities and Exchange Commission in September charged Bayou's managers with overstating their hedge funds' performance, pilfering investor funds and creating a sham accounting firm. Anthony Artabane, partner at PricewaterhouseCoopers in New York, said he has started receiving calls from investors seeking to verify that PwC is the hedge fund's auditor, but he is legally prohibited from speaking to investors. Artabane said auditors need to devise a means of confirmation, acknowledging it is a hurdle.
Suzanne Murphy, managing director of due diligence for Acorn Partners, a fund of hedge fund and registered IA in New York, said her firm has procedures in place that would have detected the problems at Bayou and Wood River. Firms should have been beefing up their procedures all along, she said.
Acorn Partners conducts due diligence of the auditor and does not invest in a hedge fund that fails to provide audited financials. "We don't only need to see the audited financials, we read the footnotes," Murphy said. Acorn also routinely conducts background checks if the manager is an unknown quantity, she said, adding Lexis-Nexis searches are one method. Acorn Partners prefers managers who take liquid positions because it is easier to monitor valuations. "We tend to favor strategies with easily marked positions," Murphy said.
-Alternative Investment News-
Posted by su at November 8, 2005 9:55 AM