How to research a hedge fund

Before investing in a hedge fund, investors and their advisers run due diligence: confirming who runs the fund, how it is structured, who holds the money and whether anything in the record is a concern. Much of the first pass can be done with free public filings.

1. Start with the fund's Form D

Form D shows the fund's legal name, location, related persons, exemptions, minimum investment, amount sold and number of investors. Every HedgeMountain fund page summarizes it and links to the filing history on SEC.gov. See Form D explained.

2. Check the adviser on Form ADV

Look up the management company on the SEC's Investment Adviser Public Disclosure site (adviserinfo.sec.gov). Form ADV shows whether the adviser is SEC-registered or an exempt reporting adviser, its regulatory assets, its owners, the private funds it manages, and the fund's auditor, prime broker, custodian and administrator. Part 2 (the brochure, for registered advisers) explains fees, conflicts and disciplinary history.

3. Look for disciplinary history

Form ADV includes disciplinary disclosures for the firm and its people. Also search the individuals on FINRA BrokerCheck and the SEC's litigation and administrative proceedings pages.

4. Read 13F filings for larger managers

Managers with more than $100 million in U.S.-listed equities file Form 13F every quarter, listing their long stock positions. 13F shows concentration and turnover, though not shorts, cash or most derivatives. HedgeMountain's firm pages estimate returns from these holdings.

5. Confirm the service providers

An independent administrator, a recognized audit firm and a qualified custodian are standard. Contact the administrator and auditor directly to confirm they work with the fund, using contact details you find independently.

6. Ask for the documents

• Private placement memorandum, partnership agreement and subscription documents
• Audited financial statements for recent years
• Due diligence questionnaire (DDQ) and track record, with how it was calculated
• Monthly investor letters and risk reports

Red flags

• No independent administrator or auditor, or an auditor you can't find
• Returns that are unusually smooth or hard to explain from the strategy
• Reluctance to share documents or let you speak with service providers
• Pressure to invest quickly, or guarantees of returns
• Filings that don't match what you're told, such as a different minimum, exemption or location

A clean record doesn't make a fund a good investment, and public filings aren't a substitute for professional advice.

Search every fund on HedgeMountain, browse hedge funds by state, or see emerging managers and new hedge funds.

Education, not advice. This guide explains general rules and market practice. It is not legal, tax or investment advice, not an offer or solicitation, and not a recommendation of any fund. Rules change; confirm details with the SEC and a qualified professional. Disclosures