Questions to Ask Your Hedge Fund Manager

Because hedge funds are structured as partnerships, you enter into a relatively intimate business relationship with the fund manager when you buy into the fund. Consider asking these questions as you build your knowledge — and your relationship with the fund manager who will handle your investments.

  • What’s your investment objective? How do you achieve alpha?

  • What’s your analysis and investment style? What would cause you to deviate from your style?

  • What’s the average number of positions your fund holds? How long do you hold a typical position? What’s the level of portfolio turnover?

  • Do you use sub-advisors? (Sub-advisors are money managers who handle a portion of the portfolio.) When and why? How do you compensate them?

  • Is your fund more suitable for taxable investors or for tax-exempt ones?

  • How does your fund keep enough liquidity to meet allowed withdrawals?

  • Did you earn your performance evenly in the past year, or did you have one or two really good months? If so, what made those months so good for your strategy?

  • What was the time (the peak-to-trough range) between your best month and your worst month?

  • Who calculates your fund’s returns? How often? Where does this person get his/her data: from the prime broker or from the fund manager?

  • How do you value the portfolio? When do you price it? How do you handle illiquid securities?

  • How does your fund use leverage? What’s the average leverage? What’s the maximum leverage allowed? How often are you near those limits?

  • Does your fund always have some leverage?

  • Does your fund borrow from one bank or broker, or from several?

  • What’s your maximum exposure to any one security? Any one market? How often are you near those limits?

  • How much of your borrowing is overnight? Short-term? Long-term? How has that changed over time?

  • What risks have you identified? What are your strategies for managing them?

  • What happens if a trader exceeds his or her limits?

  • Do you use derivatives to hedge? To speculate?

  • What are your data-backup and disaster-recovery plans? How quickly could you get back into business if your building shut down?

  • Are you registered with the Securities and Exchange Commission? With the Commodity Futures Trading Commission? Why or why not?

  • How much disclosure and reporting can I expect? How much transparency should any hedge fund investor expect?

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