Study says big hedge funds have several advantages including economies of scale, alpha, and “well known” auditors
Dec 23rd, 2008 | Filed under: Hedge Fund Industry Trends, Today's Post
Yesterday we told you about a 2006 study of the SEC’s “Form ADV”. Academics questioned whether the form – a centerpiece of the SEC’s plan to regulate hedge funds that year – was “redundant” since the due diligence performed by many hedge fund investors reveals the same information anyway.
Today, we continue on the theme of hedge fund due diligence with a look at another study co-authored by two of the same authors. In “Hedge Fund Due Diligence: A Source of Alpha in Hedge Fund Portfolio Strategy“, Stephen Brown, Thomas Fraser and Bing Liang examine the value of the due diligence performed by funds of funds. This is a particularly relevant issue right now as funds of funds come under criticism for not being able to forecast the Madoff saga.
Brown, Fraser and Liang cite a previous study that most hedge fund liquidations involved an operational component and over half of hedge fund liquidations prior to 2003 were the result of “operational issues alone”. In fact, that study (by Pfeffer & Kundro) found that:
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This was an interesting paper.
Another resource on due diligence I found useful was this new book:
Hedge Fund Operational Due Diligence:Understanding the Risks by Jason Scharfman (John Wiley & Sons 2008):
http://www.amazon.com/Hedge-Fund-Operational-Diligence-Understanding/dp/0470372346/ref=dp_rti_0