I. Hedge Fund-of-Funds Manager Questionnaire
Product Under Consideration: ______
Firm Name: ______
Contact Person: ______
Address: ______
Telephone: ______
E-mail: ______
Date Completed: ______
ORGANIZATION
1. Describe the ownership structure, including governance structure, explanation of share classes and mechanism for transferring ownership among employees (if applicable). Describe the percentage owned by employees and its distribution. What percentage does the majority owner hold? Please provide the name, relationship and percentage ownership of:
· Each parent organization
· Other affiliated organizations
2. What is the Advisor’s legal structure and where are offices located?
3. Provide an organizational chart diagramming the relationships between the professional staff as well as the parent-subsidiary, affiliate, or joint venture entities.
4. Please indicate whether the firm is certified as a Minority, Women, or Disabled Business Enterprise (MWDBE) as defined by the Illinois Business Enterprise for Minorities, Females, and Persons with Disabilities Act. If so, please provide a copy of the firm’s certification.
5. With which regulatory authorities is the Advisor registered? Please provide the date of any regulatory audits over the last 3 years.
6. Has the Advisor ever withdrawn an application to a regulatory agency? If so, please describe.
7. Provide a short history of the company, highlighting your most important milestones.
8. Do you derive revenue from any other line of business not directly associated with the Advisor?
9. Does any party related, directly or indirectly, to the Advisor (“Related Party”) hold any type of securities license?
10. Does the Advisor sponsor or have any financial and/or economic interest in any hedge fund managers who are not employees of the company? If so, does the FoHF invest in these managers?
11. Is it possible that the Advisor and/or any Related Party may receive fees or any other compensation as a result of the Fund’s investments?
12. Is it possible for the Advisor and/or any Related Party to lend or borrow from the Fund? If so, please describe.
13. Has the Advisor terminated any products/business units/services since inception or made any distributions in a prior fund “in kind” upon redemption? If so, please provide details.
14. Does the Advisor or any of its employees have any contractual or business arrangements with any other securities, brokerage, custodial, auditing or investment management firms that may lead to a conflict of interest? Is there any fee-sharing arrangement between the fund and any underlying funds? If so, provide details and describe the purpose they serve?
15. Has the Advisor or any of its principals ever been investigated, disciplined, suspended (including revocation or suspension of licenses), subpoenaed, indicted, prosecuted, or barred from investment activities by state or federal government regulatory authorities? If so, please explain.
16. Describe any current, pending or past litigation initiated against the Advisor or any of its principals.
17. Please identify the Advisor’s major business risks and what measures are in place to address these.
18. Please describe and indicate the face amount of insurance that the Advisor carries for:
a. Errors and omissions
b. Fiduciary liability
c. Fidelity bonding
Include the name of the insurance carrier in your response.
19. Has the firm or any of the key principals, including any board or advisory members, ever been denied coverage for errors and omissions, directors and officers, or fiduciary liability risks? If so, please provide a detailed explanation of the reasons given by the carrier (s) for such denial.
20. Describe your legal and compliance organization structure. Please provide details if you use any external compliance advisors, including names and roles.
21. Has the CFO been with the firm since inception? How many CPAs does the Advisor employ? Are any directly or indirectly related to any other employees in the firm?
22. What provisions do you have in place should those in charge of final investment decisions become incapacitated?
23. Please describe the Advisor’s compensation policy – specifically how you ensure that key principals are sufficiently motivated and retained?
24. Please describe any common non-compete/non-solicit provisions with key investment personnel.
25. Describe your AML (anti money laundering) policy and who has ultimate responsibility.
26. What is your policy for employee investments and/or trading outside of investments in your funds?
27. Do you have a compliance manual and an employee manual? Please describe how you go about ensuring adherence to the prescribed policies. Please include electronic copies of each as exhibits to this document.
28. Does the compliance department sign off on all marketing documentation?
STRATEGY
1. Please describe the investment objectives of the Fund.
2. Please describe your investment philosophy and how it will achieve the objectives of the Fund.
3. Please describe your strategy(s) in as much detail as possible. Please include a list of the sub-strategy categories or groupings that are used to classify underlying manager strategies and broad weightings or ranges used for allocation to these sub-categories as part of portfolio construction.
4. What do you believe to be the best benchmark for the product under consideration? Why?
5. If you invest with managers outside the U.S., which share class do you typically buy (e.g. local currency, USD other?)
6. Please provide a breakdown of principal office locations of the underlying managers.
7. Are there any strategies that you specifically avoid? Please indicate reasons.
8. Provide the names of all members in the investment policy or strategy committee.
9. What is the frequency of regularly scheduled investment policy or strategy meetings?
10. Please describe how your strategy has changed since the fund’s inception.
11. Please articulate what you believe is your competitive advantage? How do you differentiate yourself from your competitors?
12. Provide a detailed summary of your firm’s internal control structure. Who serves as your firm’s compliance officer? Does the firm conduct periodic risk assessment?
13. Have you ever violated a client guideline in the proposed strategy? If so, please describe the violation and resolution.
14. Please describe how your firm manages or aligns the liquidity provided to your investors based on the terms of your commingled and separate account vehicles, with that of the liquidity provided by the underlying managers you select and fund.
INVESTMENT PROCESS
1. Please discuss your investment process in as much detail as possible. Is your investment process top down, bottom up or a combination? What do you think is more important when building a fund of hedge funds? Why?
2. Who makes the final subjective investment decisions required by your approach? What is your process if that person is unavailable?
- Have you made any meaningful permanent or temporary changes to the investment process during the period of the published track record? Please describe any change(s) and dates they went into effect.
- For each of the last three years, what factors have been the primary contributors and detractors to performance relative to your target benchmark or peer-group?
5. What are the key factors you evaluate when determining the maximum capacity of your strategy? What is your best estimate of the maximum amount of capital that can be managed using your existing methodology and resources?
MANAGER DUE DILIGENCE/RESEARCH
- Describe how your research team is structured, including individual responsibilities and specialties of each team member.
- Describe in detail how you source managers, including any proprietary strategies for access.
- Describe your research process (top down, bottom up or some combination) and, generally speaking, how managers find their way into the portfolio.
- Please discuss any expertise and/or experience your firm has in identifying and allocating assets to strategies managed by firms owned by minorities, females, and persons with a disability.
- How many hedge funds do you currently monitor and invest with across all of the products and separate accounts on your hedge-fund-of-funds platform? Please break down your investible universe into various categories of monitoring intensity. Based on the category with the most intensity, what is the average number of managers that each analyst covers?
- Have you ever lost more than 20% in any hedge fund in which you invested? The 20% drop in NAV should be calculated from the specific hedge fund’s highwater mark (not cost).
- Please describe the system(s) you use to track manager information, including legal documents, meeting notes, portfolio characteristics & exposures, and performance statistics.
- Do you have a dedicated operational due diligence team? What is the timing of this process (before, during or after the strategy due diligence?)
- Do you perform background checks on underlying managers? Please describe how you determine whom to review, when to do it (at the beginning or end of the due diligence process) and also if you review the related management firm and/or related funds.
- List any information sources, data providers and/or external vendors you may use to generate and evaluate ideas.
SUBSCRIPTIONS
1. Who has ultimate responsibility for all buy decisions? If team based, do certain members have veto power?
2. Who has ultimate responsibility for all sell decisions? If team based, do certain members have veto power?
3. Do you have any capacity agreements in place? If so, with how many managers?
4. Do you invest with managers outside of the United States and, if so, how many of your total managers does this represent? With the varying degrees of legal recourse in offshore jurisdictions, how do you measure and evaluate controls over fund assets.
5. Please describe your philosophy toward separate accounts with managers.
6. Has your firm ever had any exposure to failed managers – for any reason, including managers that have closed due to fraud or large client redemptions? If so, please describe.
7. Please describe your procedures for redeeming assets from underlying managers. How do manage the redemption decision while at the same time not alienating the manager? What general factors have caused you to redeem from managers in the past?
8. Have historic hedge fund losses or manager failures, such as Bayou and Amaranth, caused you to rethink your investment process? Did you have any exposure to these funds and how have you changed your investment philosophy as a result?
9. Investment allocations:
- How are subscriptions allocated across the various pools you manage?
- What controls are in place to ensure that all funds/accounts are treated equally?
- Describe the process used to assess potential investments versus specific fund constraints?
- When are proprietary/house orders placed, if any? Are these done separately or with client orders? Who monitors this and how is this documented?
PORTFOLIO CONSTRUCTION
- Describe your portfolio construction methodology. What drives your net exposure and how many managers will your portfolio typically have? Please describe your diversification policy.
- On what basis do you meaningfully change the asset allocation of your portfolio? Please describe the last time this happened and your reasoning.
- How is the percentage of capital invested in any single manager determined and overall market exposure levels established and monitored?
- Do you have any maximum/minimum allocation percentages to the underlying strategies/managers? If so, indicate philosophy behind the allocations.
- How do manager capacity & liquidity terms impact the portfolio construction process and allocation of manager capacity among your commingled and separate account vehicles? What circumstances would cause a liquidity problem for the fund?
- How have you dealt with any liquidity problems in the past, specifically, have you made any changes to your processes to address liquidity issues?
- What process would you use to control and/or accommodate large additions or redemptions to your funds?
- Describe any portfolio constraints (e.g. strategy, liquidity, geography, currency, etc.) – are these internal or specifically outlined in your prospectus?
- How do you monitor correlation among various managers and how does this affect portfolio construction?
- For the last 2 managers added to the portfolio, please describe your thesis for adding them to the portfolio and how you measured their contribution to the portfolio.
- What has been your average manager turnover for each of the last 3 calendar years? What are the criteria for manager termination? Please identify each terminated manager, date of redemption notice and reason for termination.
RISK MANAGEMENT
- Who is responsible for Risk Management and to whom do they report. Please describe how they express their veto authority if portfolio limits are breached?
- Please describe the minimum level of transparency you require in order to invest with a manager.
- Describe in detail your process for communicating with the underlying managers and monitoring them once they are in the portfolio. How often do you conduct on-site visits with the manager as part of your monitoring process?
- Describe the risks inherent in your portfolio – identify the major factors to which the fund is exposed (e.g. volatility, credit, liquidity, geopolitical, leverage etc.).
- How do you measure, monitor and control derivative exposure? How do you go about getting this information from each manager and how do you validate and evaluate the information obtained?
- Describe the process, if any, you use to hedge factors to which you do not want exposure.
- Describe the process you use to monitor and rebalance the portfolio.
- Please identify and describe your top three largest drawdowns; the factors that caused them; how you recovered from them; how the experience shaped your philosophy and how these events practically affected your investment philosophy.
- How do you measure and manage risk with managers that have relatively illiquid strategies; do not provide adequate transparency; or use a short-term trading approach?
- Leverage:
- Please describe how you define and measure leverage and your general policy (including constraints) on its use.
- Do you ever use leverage at the fund of funds level? If so, what are the parameters and is there a maximum amount that can be used?
- How do you treat derivatives when calculating leverage and risk exposures?
- What are the fund’s lowest and highest levels of market exposure (both long and short) over the last three years in gross terms?
- Swaps: Please describe your use of swaps.
- Describe “hard” and “soft” overall portfolio constraints and how you ensure compliance with each.
- Describe the portfolio management tools, quantitative models and/or techniques you use to define, measure and isolate specific risks. Please provide sample reports as exhibits.
- Please describe your methods or tools you use to monitor individual managers and for aggregating portfolio risk exposures.
- What type of risk reports are made available to investors? Are any of your underlying managers on a platform such as RiskMetrics or Bear Measurisk where investors can receive monthly standard market exposure reports?
- Provide a detailed summary of your firm’s internal control structure. Who serves as your firm’s compliance officer? Does the firm conduct periodic risk assessment?
- Have you ever violated a client guideline in the proposed strategy? If so, please describe the violation and resolution.
OPERATIONS (BACK OFFICE)
- Who is responsible for your back office operations and to whom do they report?
- Describe in detail your cash management policy, including named persons with their relevant authorization levels for all cash movements into and out of the cash accounts of any funds or management companies.
- Custodian/Bank/Transfer Agent:
- How do you monitor, measure and manage counterparty risk?
- How often do you monitor counterparty quality? Please describe the process you employ.
- For each of the fund’s custodians, please indicate who they are and amount held by each.
- Describe the due diligence you performed on your current service providers. Identify your minimum quality standards; how these were evaluated and your process for ongoing monitoring.
- Is there any intention to hypothecate, pledge or otherwise enter into contracts or transactions that would use the assets of any affiliated fund (or separate account) as collateral for the obligation of another party (or fund) or have any such pledges been entered into in the past?
- Who has overall responsibility for information technology and to whom do they report? What are their general duties and how many people are in this group?
- Please list all software systems used in your accounting or back office operations and their purpose. Please indicate whether the maintenance of these programs is done internally or outsourced.
- Who has access to back office systems within the firm and how is access controlled?
- Please describe where your primary network resides and the physical security surrounding it.
- NAV pricing process:
- Who/what entity calculates monthly and official NAV?
- From where does the pricing entity obtain portfolio holding information?
- If the NAV is calculated by a third party, does the Advisor check for accuracy? How?
- How are disagreements over pricing with the pricing entity resolved?
- Are any securities held at cost? Why are they marked at cost and what percentage of the portfolio do they represent?
- Has there ever been a restatement of an official NAV? If so, please describe.
- Please describe any side-pockets employed by your fund. Describe your policies and procedures for side-pocket accounting.
- Describe the process you have in place to make funds available for redemptions, including any backup lines you may have.
- Please describe your philosophy for matching your assets (portfolio exposures and liquidity) with liabilities (redemption schedule). Has your redemption schedule changed since inception of the fund?
ADMINISTRATION
1. Has the firm changed any of its service providers since inception? If so, please identify prior service providers, date of change and reason for change.