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Qualitative Due Diligence Print E-mail

Qualitative due diligence

Commonly, an institutional type due diligence process involves a formal list of rules defining the requirements of picking underlying funds. While that kind of due diligence is still dominating in the industry, especially among institutional investors, it leads to either picking multi-billion funds with mediocre performance (passing such due diligence in any case) or underestimating the real investment risks.

Quant due diligence approach is different. Rather than generating meaningless questionnaires supposed to be filled by managers, it provides a deep insight into trading strategies and applicable risks by attempting to formalize and quantify those. A robust due diligence system should combine two inseparable parts, qualitative and quantitative, while any bias prioritizing one part over another will lead to ignoring some risk groups.

Quant Due Diligence Process

Proprietary Databases

Quant Group has conducted due diligence of over three hundred hedge funds during the last few years. The due diligence results, both quantitative and qualitative, are included into our proprietary due diligence databases. These databases are updated on a regular basis in terms of:

  • Changes in manager strategies
  • Changes in risk management practices
  • Reviewing managers’ outlook
  • Significant changes in risk/return profiles

To ensure the due diligence information is up-to-date and accurate, we hold regular conference calls with each manager included into the Quant due diligence database, usually at least once a quarter.

Synchronizing Quantitative & Qualitative Phases

Quant due diligence process integrates the most sophisticated yet less time consuming assessment techniques adapting best industry practices. The sophisticated qualitative part is highly time consuming, because engages conference calls, meetings and the detailed paperwork examination. In practice, it may take a few months depending on the manager’s location and availability. Next, the likely scenario is that a fund may pass through the qualitative examination, but then fail at the quantitative stage.

To ensure an effective time management approach, Quant due diligence stages are strictly synchronized, while some are conducted simultaneously. The due diligence time sequence depends on manager category as well as available resources.

Evaluated Risks

The qualitative phase of Quant due diligence includes evaluating the following non-quantifiable investment risks and processes:

  • Operational risks
  • Legal risks
  • Fraud risks
  • In-house risk management
  • Staff background
  • Compliance issues