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Practical Operational Due Diligence on Hedge Funds: Processes, Procedures, and Case Studies


A Comprehensive Reference for Due Diligence Professionals

Rajiv Jaitly is a veteran hedge fund operational due diligence and risk practitioner who was responsible for creating what was at the time one of the largest original independent operational due diligence teams reviewing operational risk on hedge funds. Not only does he have a wealth of first-hand experience of the procedures and processes discussed, but he has also had to deal with the repercussions from issues identified by him on cases which have resulted in problems for the investment and where history has proved him right. What he learned as a result of these eye-opening experiences – and what any investor should be on the lookout for now when considering putting money into a hedge fund – is the essence of this important book. For those specifically tasked with performing due diligence, Practical Operational Due Diligence on Hedge Funds: Processes, Procedures, and Case Studies is a must-have reference.

The book is a veritable encyclopedia of information. With many years of experience as a due diligence professional and consultant, Jaitly not only offers a wealth of information on how to perform due diligence effectively and thoroughly, he also walks the reader through over 300 case studies of issues with hedge funds. You will see what went wrong, what should have rung alarm bells and what you need to understand and do in order to identify the operational risks of hedge fund investing.

In a world where the stakes are immensely high, where short cuts might be taken in the name of expediency, and where nothing may be quite what it seems, this practical and complete guide is essential reading.

RAJIV JAITLY is the managing partner at Jaitly LLP, a risk consultancy that provides independent risk, fund governance and operational due diligence services to global alternative investment clients. He set up and managed due diligence and investment management operations for the alternative investment asset businesses of major companies such as UBS, Santander and AXA. Jaitly has also advised the Regulatory Policy team of the U.K. Pensions Regulator, was appointed an expert by the UK Office of Fair Trading for its market study into the UK defined contributions pensions market and was commissioned by the UK Financial Services Consumer Panel to write a report on Fund Costs and their implications. He has also held appointments as a non-executive director of funds.

Preface xIiii

Acknowledgments xIvii

About the Author xIix

Disclaimer Ii

PART I Processes and Procedures

CHAPTER 1 What is a Hedge Fund? 3

CHAPTER 2 Defining Operational Issues 7

CHAPTER 3 Structures for Investment in Alternatives 15

CHAPTER 4 Is the Fund for Real? Establishing the Basics 25

CHAPTER 5 Understanding Fund Operations and Controls 61

CHAPTER 6 Governance - Managing Risk Through a Non-Executive Board 65

CHAPTER 7 Reporting to Members and Statutory Reporting 75

CHAPTER 8 The Curse of Leverage (Fund Liabilities) 87

CHAPTER 9 Fund Assets 103

CHAPTER 10 Fraud 129

CHAPTER 11 Fees: the Essence of Hedge Funds 137

CHAPTER 12 Regulatory Actions, Politics and Market Confidence 149

CHAPTER 13 Key Man Risk, Disaster Recovery and Business Continuity 175

CHAPTER 14 Negotiating Terms and Exercising Rights 181

CHAPTER 15 Risk Ratings and Scoring 195

CHAPTER 16 Marketing to Investors 229

PART II Case Studies

CHAPTER 17 Case Studies Pre-2000 239

CHAPTER 18 Case Studies 2000 275

CHAPTER 19 Case Studies 2001 285

CHAPTER 20 Case Studies 2002 289

CHAPTER 21 Case Studies 2003 297

CHAPTER 22 Case Studies 2004 313

CHAPTER 23 Case Studies 2005 319

CHAPTER 24 Case Studies 2006 359

CHAPTER 25 Cases Studies 2007 401

CHAPTER 26 Case Studies 2008 475

CHAPTER 27 Case Studies 2009 601

CHAPTER 28 Case Studies 2010 677

CHAPTER 29 Case Studies 2011 717

CHAPTER 30 Case Studies 2012 773

APPENDIX A Index of Case Studies by Investment Manager 785

APPENDIX B UK Serious Fraud Office Hedge Fund Investor Questionnaire 793