Due diligence investigation of hedge funds includes an in-detail review of the fund’s activity to ensure it is in compliance with its prospectus. It is a road map for existing and potential investors in understanding whether a specific fund will meet their investment horizons, risk tolerances and investment strategies. Due diligence in the United States would include an examination of:
A fund snapshot
Disclosed investment strategy
Assets under management (a copy of the fund’s portfolio from the custodian is usually requested)
Audited financial statements if the fund is regulated by the U.S. Securities and Exchange Commission (SEC)
Fund’s terms and details
Regulatory registration if any
Backgrounds of fund managers
In seeking a fund that most closely matches their individual investment profile, investors may:
Consult a professional
Read the fund’s prospectus or offering memorandum
Review the fund’s historical performance
Research reviews of and articles about the fund
The term operational due diligence is often used to describe the due diligence process used by hedge fund investors, particularly where this incorporates, or focuses largely on, operational risks.
Persons involved in buying, selling, lending, and managing commercial real estate routinely need to perform a variety of types of commercial property due diligence.
Environmental due diligence during commercial real estate and transactions can include Phase I and Phase II Environmental site assessments. Such assessments are often undertaken in the United States to avoid liability under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as the “Superfund law”.
An engineering or property condition assessment (PCA) would include a review of building systems to evaluate deferred maintenance items that can materially affect the operation and value of a property. Building systems would include the foundation, roof, HVAC, electrical, plumbing, vertical transportation, and building envelope (windows and walls). One result of the report is often a cost table showing the immediate and necessary future repairs and their associated costs. As an example the table would show that in 2 years the outside will need to be painted and that in 5 years the parking lot will need to be resurfaced. These reports are good for negotiating the price of a property as well as financial planning. They are required as part of securitized lending commercial mortgage-backed securities.
It is also common for due diligence in a commercial property transaction to include securing a title insurance policy regarding the ownership of the property and the encumbrances to which it is subject, and requiring the owner to secure an attornment from each tenant establishing agreement as to lease terms currently in force, and to research the zoning laws applicable to the property, building code compliance of the premises, the existence of any special assessments of property taxes applicable to the property, and the sales price history of the property.