Questions to Ask Hedge Fund Managers
The best questions to ask a hedge fund before you invest are the ones a pitch deck is built to step around. These 55 are the ones to ask a fund manager face to face, at a first diligence meeting or an annual review, and they run in the order diligence usually does: strategy and edge, how the portfolio is built, risk and leverage, the track record, fees and terms, and last the firm and its operations. Fund structures, investor eligibility, registration and tax treatment differ by country, so where a note touches one, ask how it works for the vehicle you would be in.
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The questions
Each question, and why to ask it
Strategy
What is the strategy in one sentence, and what would have to be true for it to stop working?
Why ask it
A manager who cannot compress the strategy into a sentence either lacks one or does not want you to have it. The second half matters more: naming the condition that breaks the strategy shows they have thought about their own obsolescence.
Where does the edge come from: information, analysis, structure, or patience?
Why ask it
The four wear out at different speeds. An information edge tends to fade as others get hold of the same data, while one built on structure or patience depends on investors who stay put. Working harder than everyone else is not on the list, and neither is reading the same filings.
Who is on the other side of your trades, and why do they keep getting it wrong?
Why ask it
An edge needs a loser, and a manager with a real one can usually describe that counterparty: a forced seller, an index fund that must buy, a holder who is not allowed to short. If nobody specific comes to mind, the return may be market exposure with a story attached.
What is your average holding period, and how many positions do you hold?
Why ask it
These two numbers together tell you what the strategy actually is, regardless of how it was described. A manager who calls the approach long-term value while turning the book over every three weeks is doing something else.
Take one position in the book today: where did the idea come from, and who argued against it?
Why ask it
A single live example shows the research process better than the slide that describes it. Listen for whether anyone inside the firm pushed back, and whether the position ended up smaller because of it.
Which market conditions suit this strategy, and which is it built to lose money in?
Why ask it
Every approach has a kind of year it is wrong for, whether that is a sharp rally for a short-biased book or a quiet market for a volatility trader. A manager who names that year in advance has handed you the yardstick for judging the next one.
How much of your return has come from the short book, and how much from being long a rising market?
Why ask it
If most of the gain came from being long while markets rose, an index tracker would have delivered much of it for a fraction of the fee. Have them split the long and short contributions year by year, and note whether the shorts made money or only reduced the swings.
What do you do differently from the three funds an allocator would compare you with?
Why ask it
The manager knows who they are measured against, and the peers they name show how they see their own niche. Whatever difference they describe should be visible in the holdings, not only in the marketing.
What is your capacity in this strategy, and at what size do returns start to degrade?
Why ask it
Past a certain size the best ideas can no longer be bought in an amount that moves the fund, and the returns start to look like the market's. Get a figure and a commitment to close to new money there, because the number named today is one you can hold them to in two years.
Portfolio
How do you size a position, and what is the largest single position you have ever held?
Why ask it
Sizing is where conviction meets risk control. The largest historical position is a hard number that says more about discipline than any description of the process around it.
What share of the fund sits in your ten largest positions, and how has that moved over time?
Why ask it
Concentration is neither good nor bad, but it has to match the pitch. A book described as diversified with half its assets in ten names is making a different bet from the one on the first slide.
When a position falls sharply against you with the thesis intact, do you add, hold or cut, and who decides?
Why ask it
Averaging down is the decision that can turn an ordinary loser into a fund-sized one, because the cheaper price feels like confirmation. A written rule, such as a forced review at a set loss, tells you more than a description of judgment.
How do you decide to sell, both when you are right and when you are wrong?
Why ask it
Pitches spend far longer on how a position gets bought than on how it leaves. Press on the winners in particular: a stop on losses is easy to describe, while the rule for trimming something that has doubled is often missing.
Which of your positions are also widely held by other funds, and how do you keep track of that?
Why ask it
A crowded position can fall for reasons unrelated to the company, simply because another fund has to sell it. You are finding out whether they monitor overlap at all, and whether it has ever changed how much they hold.
What do you use derivatives for: hedging, leverage, or expressing a view?
Why ask it
Options and swaps can cut risk or multiply it, and the monthly letter rarely says which. Have them point to one derivative position in the current book and explain what it does to the fund on a bad day.
What is your most uncomfortable position right now, and why do you still hold it?
Why ask it
This moves them out of the pitch and into the present. You learn whether they can hold a thesis under pressure or are quietly talking themselves out of it while you sit there.
How has the book drifted from what the original mandate described?
Why ask it
Drift happens a step at a time, and each step has a sensible explanation. Comparing today's holdings with what the offering documents describe costs you an afternoon, and how willing they are to discuss the gap is itself a finding.
Risk
How much leverage do you run, gross and net, and what would force you to cut it?
Why ask it
Gross and net exposure can hide behind one headline leverage figure. The part worth pinning down is the trigger: the loss level or margin call at which they sell because they must rather than because they chose to.
What are your financing terms, and how quickly can a prime broker raise the margin it asks of you?
Why ask it
Borrowed money that can be recalled at a day's notice turns a paper loss into a forced sale. Term financing and more than one financing relationship are the usual defences, so ask which the fund has and what each costs.
Which risk limits are written down, and what happened the last time one was breached?
Why ask it
A limit matters only if breaking it sets something off. The useful half is the story of an actual breach: who noticed, how long the fix took, and whether the limit was quietly raised afterwards.
Who is responsible for risk day to day, and can they make you cut a position?
Why ask it
A risk officer who reports to the person they are meant to restrain can only advise. The detail to get is an occasion when the manager was overruled, and what was sold as a result.
Which scenario in your stress tests worries you most, and what does the fund lose in it?
Why ask it
A number here, even a rough one, shows the exercise is real and not a page in the deck. Set it beside the worst drawdown they have reported and ask why the two differ.
How do you hedge, and what has that cost in the years you did not need it?
Why ask it
Protection is a running expense, and a manager who has paid it through quiet years can tell you the bill. One who hedges only after markets have fallen is buying insurance once the price has already gone up.
What do you hold that you could not exit within a week?
Why ask it
This is the liquidity mismatch question, and a mismatch is how a fund fails rather than merely underperforms. Set the answer against the redemption terms in the offering documents: investors able to leave faster than the book can be sold is a structural problem.
What share of the fund's assets do your three largest investors hold?
Why ask it
If one large investor leaves, the manager may have to sell positions to pay them, and whoever remains bears the cost of that selling. A fund of funds or a single family office holding a big slice makes the fund's stability partly their decision.
Where is the fund's spare cash and collateral held, and with how many counterparties?
Why ask it
If a broker or bank the fund depends on gets into trouble, assets held there can be tied up for a long time. Ask how much sits outside the prime broker, and what protection applies in the jurisdiction the accounts are in, since those rules vary.
Track record
What is your worst drawdown, how long did it last, and how long did recovery take?
Why ask it
Depth alone is easy to narrate away. The length of the fall and the wait to get back to the old high are what an investor has to sit through, and a long wait is when patience tends to run out.
Are the returns in this deck net of every fee and expense, and for which share class?
Why ask it
Gross returns, or the returns of a founders' class with cheaper fees, can sit well above what a new investor would have earned. The series to judge is the one for the class you would be buying.
How much of this record was earned here, with this team, at roughly today's asset size?
Why ask it
Numbers carried over from a previous employer, or made when the fund was a tenth of its size, describe a different business. Ask which years they would strike out if they were assessing themselves.
Which few positions, or which single year, account for most of the return since launch?
Why ask it
Take away the best year and the two best trades and see what is left. A record that survives that points to a repeatable process; one that does not may still reflect skill, though you would be paying for a small number of calls.
What were your three biggest losing positions, and what changed afterwards?
Why ask it
Every manager has losses, so the signal is whether they can name them specifically and point to a rule that changed. Blaming the macro environment with no process change is the answer to be wary of.
How has the fund done in the months when the wider market fell hardest?
Why ask it
Many investors buy a hedge fund for what it does when everything else is down. The fund's return in each of the market's five worst months over the record is a short table, and one they can produce if they want to.
What happened to your assets and your investor base in your worst year?
Why ask it
Behaviour under stress is more informative than performance under stress. Whether they gated, how they communicated, and whether investors stayed is the best available preview of the next bad year.
Can I see every monthly return since inception, including any fund or account you have closed?
Why ask it
A track record can be flattered by leaving out a vehicle that was wound up. Asking for the closed ones by name is ordinary diligence, and reluctance to hand them over is an answer.
Fees and terms
What are the fees, including any expenses passed through to the fund?
Why ask it
Management and performance fees are only the start. Some funds also charge research, technology or even staff pay to the fund, which never shows in a headline fee comparison. If the answer is vague, the total expense figure is in the audited accounts.
How does the performance fee work: is there a hurdle, a high-water mark, and when does it crystallise?
Why ask it
These three terms decide whether you pay only for returns above a floor, whether past losses are made back first, and how often the fee is locked in. A fee taken quarterly on gains that later reverse is usually not handed back unless the documents include a clawback, so timing matters as much as the rate.
How much of your own money is in the fund, and on the same terms as mine?
Why ask it
Co-investment matters less than the terms attached to it. A manager whose personal capital sits in a share class with better liquidity or lower fees is not aligned with you in the way the headline number implies.
What are the liquidity terms, and is there a gate or side pocket provision?
Why ask it
Lock-ups, notice periods and gates decide whether you can leave in exactly the scenario where you will want to. Read the gate language while things are calm, because it is written to be used when they are not.
When I redeem, how long until the cash arrives, and is any of it held back until the audit?
Why ask it
The notice period is only the first wait. Some funds pay most of the proceeds soon after the dealing date and keep a slice until the year's accounts are signed off, which can be many months later.
Has any investor been given a side letter with better fees, liquidity or transparency than I am being offered?
Why ask it
Side letters are common and not a problem in themselves. What you need to know is whether another investor can get out ahead of you or see the book when you cannot, and whether the same terms are open to you.
What is the minimum investment, and what do I need to show to qualify as an investor?
Why ask it
Hedge funds are generally open only to investors who pass a wealth, income or professional test, and the test depends on the country and on how the fund is set up. Find out which one applies to this vehicle and what the administrator will want from you before a subscription is accepted.
Which vehicle and share class would I come in through, and how does that affect tax reporting where I live?
Why ask it
Onshore and offshore feeders into the same portfolio can be taxed and reported quite differently depending on the investor's country and status. The manager can describe the structure, but the tax answer should come from your own adviser.
What will you send investors, how often, and how much of the book will I be able to see?
Why ask it
Some funds show full positions, some only exposures by sector, and some little beyond a monthly return and a letter. Decide beforehand how much you need in order to stay invested through a bad quarter, then check the reporting provides it.
Operations
Who is your prime broker, administrator, and auditor, and has any of them changed recently?
Why ask it
Independent administration and a recognisable auditor are basic structural protections. A recent change to any of the three deserves a follow-up on who ended the relationship and why, above all when the one that changed is the auditor.
Who prices the positions that are hard to value, and how often does the administrator disagree with you?
Why ask it
For anything without a daily market price, the valuation is an opinion, and the manager's fee depends on it. An independent pricing source and a record of the administrator pushing back are what make that opinion trustworthy.
Who can move cash out of the fund, and how many people have to approve a transfer?
Why ask it
It is a dull control question, and it is the one that guards against outright theft. A sound answer involves at least two people, one of them outside the investment team, and an administrator who sees every payment.
Where is the firm registered, and what did the most recent regulatory exam or inspection raise?
Why ask it
Registration requirements for fund managers differ by country and by fund size, so ask which regime applies and look the firm up on that regulator's public register if it has one. Findings from an exam are routine; a refusal to discuss them is less so.
What are the rules on staff personal trading and on using expert networks, and who checks them?
Why ask it
Compliance failures around inside information have closed funds whose investments were fine. You want to hear about pre-clearance, a restricted list and a named person who reviews both, not a general assurance of integrity.
Do you run other funds or separate accounts alongside this one, and how are trades split between them?
Why ask it
When a good idea is in short supply, someone decides which vehicle gets it, and the one that pays higher fees or holds more of the manager's own money is the tempting choice. A written allocation policy, checked by somebody outside the investment team, is the reassurance to look for.
How is the investment team paid, and how much of it is deferred or invested back into the fund?
Why ask it
Pay shapes risk-taking. An analyst paid on one year's profit from their own ideas has a reason to swing, while pay that is deferred or tied to the whole fund's result keeps people around for the consequences.
Who has left the investment team in the last three years, and why did they go?
Why ask it
Departures are normal, but senior analysts leaving one after another just after bonuses are paid says something about how credit and pay are shared. Ask whether you may contact one of them, and watch the reaction.
Who owns the management company, and does it cover its costs from management fees alone?
Why ask it
A firm that needs a performance fee to pay salaries is under pressure to take risk after a flat year. Outside owners or a seed investor may also hold rights over the business that you would want to know about.
What happens to the fund if something happens to you?
Why ask it
At a small fund the manager often is the strategy, so this is a question about the documents and not about good intentions. Find out whether a key-person clause lets investors redeem if the manager leaves or cannot work, and who would run the book in the meantime.
Could I speak to your administrator, and to an investor who has redeemed?
Why ask it
Reference calls are standard at this stage, and the manager will naturally offer happy clients. Someone who left can tell you how the redemption was handled, and the administrator can confirm the assets and the investor count independently.
What do allocators fail to ask you that they should?
Why ask it
It hands the manager the floor to name the risk in their own business, which every other diligence question puts them on the defensive about. The reply is often candid, and a manager with nothing to offer has told you something too.
Meeting a fund manager
Practical guidance for the conversation itself
Before the meeting
- Read the offering documents and the last two annual reports first, so the meeting is spent on what the documents do not say.
- Write down the two or three answers that would rule the fund out, and ask those questions early rather than saving them for the end.
- Bring the monthly performance series and ask them to walk you through the three worst months.
- Settle your own liquidity needs before you go; terms that look acceptable in a good year are the ones that bind you in a bad one.
Spreading the questions across meetings
First meeting: strategy and portfolio
Spend the first conversation on the Strategy and Portfolio groups, which need the manager in the room and cannot be answered from documents. If the one-sentence strategy and the source of the edge do not hold up, the later groups are not needed.
Second meeting: risk and the record
Bring the monthly returns and go through Risk and Track record with the numbers on the table. Mark the worst months beforehand so the discussion stays on specific dates and positions.
Operational diligence is a separate visit
Most of the Operations group is put to the chief operating officer or the head of finance, not the portfolio manager, and ideally at the firm's own office. Pay, departures and succession are the exceptions: those answers should come from the manager. Fees and terms can largely be settled from the offering documents, with the meeting kept for what they leave open, such as side letters.
If you are already invested
At an annual review, the questions that earn their time are the ones whose answers change from year to year: capacity, drift from the mandate, the most uncomfortable position, team departures and how much of the fund the largest investors hold.
Reading the answers
Specific losses beat general humility
Every manager says risk management matters. Only some can name the position that hurt, the size it had reached, and the rule that changed afterwards. Keep pushing until you get the third part.
Watch for process questions answered with performance
When you ask how something is done and get returns in reply, the method is usually weaker than the record. Ask the process question again in different words before you move on.
Separate the strategy from the business
A sound strategy inside a firm gathering assets faster than the strategy can absorb them will disappoint. Fees, capacity and headcount are part of the diligence, not a distraction from the investment case.
Common mistakes on your side of the table
- Asking for a stock idea, which converts a diligence meeting into a pitch and wastes your leverage.
- Anchoring on last year's return, which says little about the next one and nothing about how it was earned.
- Accepting a Sharpe ratio without asking about the period, the benchmark, and whether it is gross or net of fees.
- Skipping the operational questions because they are duller than the investment ones, when an operational failure is the kind that can cost the whole investment and not just a bad year's return.