Due Diligence on Kirk Wright
One of the best and worst features of the Net is the ability to do "instant" research. Could the investors in Kirk Wright's hedge fund done sufficient due diligence to avoid his alleged scam or fraud? A search on "hedge fund due diligence" revealed this checklist from a website called "credit market risk advisors":
The following are good general risk questions for beginning a dialogue:* How do you insure the separation of front and back office?
* Who marks the book to market? Who reviews? Who has market authority and override? Who receives report overrides?
* Do you have written policies and procedures? May I please see them?
* How do you manage risk?
* Do you have a designated risk manager?
* Do you include risk limits in your guidelines?
* If someone breaches his or her limits, what happens?
* What are your backup and recovery plans? Have they ever been tested? Where are copies of the plans maintained?
* How do you define leverage? What is the max leverage you are allowed? How often are you at or near the max? If you were max leveraged and your prime broker doubled your haircuts, how much would that cost to fund?
* How much of your borrowing is O/N? Short term? Long term? How has that changed over the past 12 months?
* What is risk? Do you have a risk conscious culture? What defines your culture?
* What is your attitude towards transparency?
* Since you trade in multiple time zones, how do you calculate your NAV?
* Evaluate ongoing appropriateness of strategy versus initial premise.
What good is this list, if you are unsophisticated investor?
An unsophisticated investor in hedge funds would not understand most of these questions, let alone the answers. Is the checklist then useless?
No, if I know that I cannot know how to perform due diligence on this financial product, then I should not be investing in this sector. This is not a hard logical inference to perform: football players who cannot play golf would not bet their any savings on making the PGA cut.
This is similar to the inference that most franchisees and business opportunities purchasers also fail to make: what about the local market do I know which will make this opportunity profitable? What do I know that other people don't? Again, if you don't know who the patsy is at the poker table -leave quickly.
Comments
So much for the federal requirements that hedge fund investors be "qualified" as experienced and sophisticated investors. Some of Kirk Wright's victims may have been, but the great majority were not. That didn't stop him from conning them anyway.
Posted by: Anonymous | June 13, 2006 11:21 AM