Alternative Investment Management Association has released a page of due diligence questions ahead of the expected influx of liquid alternatives products.
The global body, which has been in Canada for 15 years, is the industry standard for alternative investment sound practice guides.
Claire Van Wyk-Allan, director, head of Canada, said it pared down the typical 115-page institutional classic hedge fund due diligence questionnaire to 35 pages and then even further to just one page, which advisors can keep to hand (see below).
She said: “It’s really meant to be questions they should be asking the fund wholesaler and/or fund portfolio manager, whoever is in their office presenting.
“And really they are great questions for any investor to properly understand, although we do note that obviously investors come with a varying degree of financial literacy in the first place.”
Liquid alts will mean hedge fund or private equity strategies are made available through a mutual fund account. With regulatory approval, these funds will be opened up to retail investors and Van Wyk-Allen said that, given the late stage of the cycle, the timing of these new products will be enticing for a lot of investors.
“If we look to alternative UCITS in Europe and 40 Act funds in the States, there has been a great adoption rate,” she said, adding that she is hearing that final liquid alt rules will be released at the end of the month or start of October.
“Equally, given we are late in the economic cycle, thinking about diversification, non-correlated returns and reducing risk is incredibly important for advisors and investors to consider.
“Time is absolutely right for the liquid alts to be launching but, equally, [let’s] not forget about traditional offering memorandum hedge funds. If you have a high-net-worth client who can purchase those, then that’s a great option to diversify your portfolio as well.”
AIMA’s key due diligence questions for retail investment advisors
For investment manager
What is the background and experience of investment manager & the investment team?
What is the governance surrounding the investment manager & investment team?
What are the features of the investment manager’s compliance culture?
What risk management frameworks are in place (independent reporting lines, operational risk management, conflicts of interest, etc.)?
Are the members of senior management of the investment manager, the portfolio manager and/or the fund directors personally invested in the fund?
What is the fund’s investment objective and principal investment strategies?
Have the objectives of the investment strategy changed in the past 5 years?
From where are the underlying positional data, market data and any underlying models sourced for this strategy? Position limits?
Who makes the portfolio management decisions and how are they made?
Performance history? In what type of markets would this strategy be expected to outperform or underperform?
What method(s) does the investment manager use to measure the total risk of a portfolio using this strategy?
How much financial leverage does the fund use on average? Limits? Sources?
Are there any capacity constraints?
Offering documents, subscription agreements, and process for purchases and redemptions? Fees? Performance fees and calculation methodology?
Valuation policy and frequency?
How long would it take in normal market conditions and stressed market conditions to liquidate the fund without incurring unusual costs?
What portfolio data does the investment manager provide to investors, and with what frequency and time lag?
Who are the outsourced service providers of the fund (i.e., prime broker, auditor, custodian, administrator, legal)?
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