GREENWICH, Conn., Oct. 19 /PRNewswire/ -- The worst of the pain and disappointment suffered by investors in alternative investments during the high profile blowups of the last two decades could have been avoided by more thorough due diligence, according to a new white paper issued today by the Greenwich Roundtable (GR). The white paper details step by step best practices in due diligence that investors should pursue as they consider all alternative investments, not just hedge funds.
The white paper is the fifth in a series of alternative investment reports published by the GR, a not-for-profit research and educational organization comprised largely of institutional investors overseeing a collective $3.2 trillion in assets.
The white paper covers all alternative asset classes, including hedge funds, venture capital, buyout funds, distressed security funds, real estate, natural resources, and funds of funds. The paper, edited by Rusty Olson, former director of pension investments for Eastman Kodak Company, reflects the thinking of a highly diverse group of 15 contributors who have long been active in the business.
"The Madoff fraud served as a real wake up call that better due diligence is needed," said Steve McMenamin, executive director of the GR. "Better due diligence can't be legislated. Rather, hard work, a tireless attention to detail, and good judgment is required when investing in alternative assets."
"We're investing in alternatives and we're investing along the road less traveled. It's about investing in people rather than instruments. It's about uncovering unique skills. Above all, we're investing in structures based on trust. Are these people those we would like to be in business with?"
The paper is written for sovereign wealth funds, fund-of-funds, foundations, endowments, pension funds, and private investors. "We believe the paper may also be of value to government policy makers, as well as managers of alternative investment funds as they prepare due diligence questionnaires (DDQs) for their prospective investors," added McMenamin.
"As investors, after we have determined that an investment opportunity seems attractive, we have only begun the due diligence process. We must then focus on more mundane questions about the quality of a fund's operations, concerns about any one of which could rise to the point of being a show stopper."
Ten potential red flags to consider when considering an investment in an alternative investment manager might include:
- Investments in a crowded zone of opportunity
- Overly consistent performance
- Fees that are excessive in relation to a manager's skill or track record
- Change in an accounting firm, prime brokerage firm or legal counsel
- Liquidity mismatches
- Lack of an independent administrator to check the pricing of securities
- Investments in an area where a manager has little skill
- No cohesive business plan
- Highly volatile returns and no independent risk management function
- High leverage
- Liberal gate provisions and lack of fee incentive alignment
- Track record which is not independently audited
Information about obtaining copies or joining the Greenwich Roundtable is available at www.greenwichroundtable.org.
About the Greenwich Roundtable:
The Greenwich Roundtable is a not-for-profit research and educational organization located in Greenwich, CT, for investors around the world who allocate capital to alternative investments. Its mission is to educate sophisticated investors and to establish best practices for limited partners.
SOURCE Greenwich Roundtable