Funds are useful in terms of democratizing hedging strategies and private market investments. They help well-informed and professional investors access highly desirable asset classes such as private equity, private credit and real assets whilst keeping a diversification strategy in place.
Certain funds – such as those offered by Saratoga Capital – are subject to heightened investor protections. They have enhanced governance protocols that include a manager and depository, both of which are fully licenced. They have very clear investment strategies, have periodic reporting obligations, and require participating shareholder approval in certain cases.
While funds provide certain protections, they may not be suitable for all investors. It is important for investors to conduct their own due diligence on a prospective fund, much like the diligence of private investment structures. Due diligence should focus on gaining a clear sense of a fund’s investment objectives and risks, management, fees and redemption options.
When considering an allocation to such a fund, the most critical factors to review are a fund’s investment strategy and objectives, as well as its expected risk and return profile.
There are several questions to ask to get a good sense of risk and return:
Once you feel comfortable that you understand the risk and return profile of a fund, you can determine if it aligns with your objectives.
While evaluating the risk and return profile, you will get a general sense of how a manager views the markets and how they apply their skills to manage the fund. Funds that incorporate hedging or private investment strategies could potentially have minimal, if any, track records, so it is important to investigate the manager’s background and previous investment experience running a similar strategy or their past performance with other fund companies.
Fees are another key area of due diligence. Most funds will have three distinct types of fees: upfront or offering fees; operating fees; and liquidation fees. Upfront fees include commissions and marketing fees. Examples of operating fees include real estate property management fees, financing fees, or performance-based fees based on achieving pre-specified metrics. Liquidity fees include real estate disposition fees, loan termination fees, or other fees and expenses related to selling or liquidating fund assets. Fees can vary significantly by structure and asset type, so an important factor in reviewing fees is to compare similar funds.
Another key area to review as part of your due diligence of a fund is its liquidity or redemption options. An example of key questions to ask include:
It is critical that you perform proper due diligence of a prospective fund’s investment objectives and risks, performance expectations, management, fees and redemption options. A full understanding of these characteristics will help you to properly position these funds into your portfolio, so that you stay happily invested for the long term.