Alternative Investments: Investing in Alternatives

Number crunching, or quantitative analysis, is important for investors. But it is only half of the story. Qualitative analysis is equally important.

The main purpose of qualitative analysis is to understand fully the markets, instruments and strategies the manager is trading.

Qualitative analysis is particularly important when it comes to investing in hedge funds, which are often small outfits, with only one or two managers. What is more, because hedge funds are unregulated, they may change strategy without informing their investors.

It is important to remember that there is no such thing as a stupid question when it comes to performing this kind of due diligence.

Among the questions that investors ask are these:

• Describe your strategy: the principles, instruments and markets traded?
• What makes the strategy unique?
• Has the strategy or market traded been changed, if so, for what reason?
• How is the portfolio hedged?
• How do you calculate correlations, risk, leverage, etc.?
• What sources of information are you using on the markets traded?
• Could the resignation of one fund manager alter the strategy?
• Which brokerage firms do you use?
• How long has the fund been established?
• What is the background of the fund managers?