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Perform Due Diligence Prior to Investing

Before making investment decisions, it is imperative that individual investors and financial advisers learn as much as possible about the mutual funds, hedge funds and private equity investments they are considering. Performing proper and comprehensive research and analysis is critical when selecting funds and other investments for a portfolio.

 And even if an executive or business owner works with an asset manager, they should understand the investment thesis of each investment, as well as the risks of the investment strategy and how the investment’s adviser plans to minimize those risks, when possible. 

Prior to delving deeply into the topic of due diligence, let’s first discuss the underpinnings of a strong investment philosophy. The first tenet of a strong investment philosophy should be diversification so that all investments in the portfolio do not appreciate or depreciate in tandem. Second, it’s important to be tax aware without letting the tax tail wag the dog; that is, tax concerns alone should not direct investment choices. And third, patience is essential; focus on long-term goals and objectives. Keeping this investment philosophy in mind when evaluating any investment will serve you well. 

One of the best ways to perform due diligence on a potential fund or other investment opportunity is to do a SWOT analysis. SWOT stands for strengths, weaknesses, opportunities and threats.  By analyzing these four factors, an investor will have a better understanding of a fund or other investment’s viability. 

How can information about an investment opportunity’s strengths and weaknesses be gathered? The responses to due diligence questions regarding mutual funds are available publicly and can be obtained through readily available resources in the financial media. But similar information on hedge funds or private equity funds is not publicly available. Consequently, it is advisable for a financial adviser to visit the investment adviser’s headquarters or meet with a fund manager.

 Before investing, it is imperative to fully grasp the past track record of a hedge fund or private equity group. And prior to committing capital to an investment, it’s important to confirm that the fund’s founder and lead portfolio manager have significant skin in the game; what percentage of the investment do they own?  

When analyzing an investment, the most critical things to look for are the investment’s sustainable competitive advantages. What makes this fund or investment opportunity better than others in the same sector? Does the team behind the investment vehicle possess a greater level of skill than its peers? How is the investment differentiated from others like it and where does it add value (e.g., security selection, sector weightings, country selection, currency, market timing, trading, multiple strategies, etc.)?

Of course, we can’t only evaluate the positive features of an investment, but must also scrutinize the possible negatives – the potential threats to a fund or investment opportunity.  In very elevated terms, what could possibly bite an investor in the butt? 

Finally, investors, asset managers and financial advisers must understand how a mutual fund, hedge fund or private equity firm measures and controls risk. Interested investors should ask fund managers to describe the research methods and sources through which information on an investment opportunity is gathered, including any external support (e.g., company management, Wall Street analyst, third party research, talking to customers or suppliers, etc.)? 

Before making a significant investment in a mutual fund, hedge fund or private equity opportunity, then, remember to do your research by performing a SWOT analysis, determining the sustainable competitive advantages, asking about threats and discovering how risk is measured. While doing so will not completely eliminate risk, it can significantly reduce it, enabling asset managers, financial advesers and individual investors to sleep better at night. 

Michael Joyce, founder and president of Agili

Michael Joyce, CFA, CFP®, founder and President of Agili in Bethlehem, PA and Richmond, VA is responsible for overall investment strategy, management of investment portfolios and financial counseling services. He can be reached at

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