Corporate governance: there are a number of issues which should be considered when looking at a fund’s corporate governance, particularly when it comes to offshore investment vehicles. Ideally, the board should consist of independent directors. The investors should check that the board acts with sufficient integrity. One of the ways to check that there is sufficient integrity is to ensure that there are enough checks and controls in place supported by a proper corporate governance culture. To establish this, the investors should request copies of relevant board minutes.

Manager’s co-investment: A manager who can operate without any personal risk is quick to be cavalier with other people’s money.  It is important to verify if the manager and other key individuals have their own money invested in the fund, and how much.

Fees structure: remuneration policies are a good indicator of a manager’s future behaviour. The investor should particularly focus on the management and performance fees. The best metric to identify if the manager is charging unreasonably high fees is to use the total expense ratio. However, since there are no rules/laws on fees, the investor should rely on his/her own assessment and examine if the fees are aligned with the general industry practises.

Risk management: risk management personnel should conduct regular testing of all risk management protocols and continuously monitor all risk exposures. It would also be prudent to obtain prior risk management documentation from the manager and his team to determine if they have been adequately addressing all market risks in the past.

Service providers: It is necessary to identify any potential conflicts of interest. First, the various service providers should be segregated and autonomous to minimize conflicts of interest. In addition, the quality of third party service providers should be assessed thoroughly.

Key man risks: It is important to identify the extent of the fund’s reliance on key individuals. If most of the fund’s operations are conducted by a couple of personnel, the risk of losing these key individuals should be addressed.

Background checks: reviewing the biographies of principles and other key individuals should be one of the first steps undertaken by the investor, as it gives him/her a quick general overview of the background and amount of experience of those involved. The first documentation provided to the investor by the manager is the fund’s marketing presentation, and it usually contains general information on the manager’s team. It is also sensible to conduct regulatory-level searches and more complex background checks.