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Five Ways to Impress Hedge Fund Investors at Your Next Due Diligence Meeting

By Kaleigh Alessandro | Thursday, November 17th, 2016

Operational due diligence meetings have become impactful moments for hedge funds to impress both current and potential investors. Firms have the ability to answer questions, alleviate fears and market themselves in a one-on-one setting that affords more opportunity than a completed due diligence questionnaire and an up-to-date performance sheet.
But how can today’s hedge funds truly set themselves apart and impress investors during these ODD meetings? Here are five ways:

1. Demonstrate your knowledge of and commitment to regulatory compliance.

Increasing regulatory oversight of investment firms has been a consistent trend over the course of the last few years, and it can be a challenge for hedge funds to keep abreast of changing legislation and regulator expectations. Disclosure and reporting requirements under the Investment Advisers Act of 1940, record-keeping requirements under the Dodd-Frank Act, and growing cybersecurity recommendations as part of the SEC’s ongoing inquiry are just a few of the initiatives to keep track of. But demonstrating to investors that your firm has knowledge of these regulations and takes them seriously will serve you well.
Whether your firm is compliant to the SEC, FINRA, NFA, CFTC, FCA – phew! – or another regulatory body, it’s imperative that you take the time to fully understand your firm’s legislative requirements and, in writing, show investors your level of preparedness. For example, if you’re a registered investment adviser with the SEC, are you aware of the proposed rule that would require firms to implement business continuity and transition plans? Have you compiled a document that outlines the SEC’s 28 points identified in its cybersecurity risk alert? Coming to your next investor due diligence meetings with this knowledge and the appropriate documentation will demonstrate that you take regulatory compliance seriously and are equipped to comply with the necessary requirements facing your organization.
Speaking of cybersecurity.

2a. Exhibit your ongoing commitment to cybersecurity preparedness…

The fundamental word to focus on here is “ongoing”. Achieving security cannot be a one-time, set-it-and-forget-it exercise. Rather, it must be an enduring and evolving process to placing your firm in its best position to ward off cyber threats – which are also enduring and evolving as time passes. To investors, it’s critical to demonstrate that while you may have invested heavily in a robust, cyber-smart infrastructure, you have also spent money and time establishing a comprehensive program to combat security threats.
Because threats are constantly evolving and savvy hackers are executing new methods of attack, show investors that you regularly conduct (through a third party) vulnerability assessments and/or penetration tests to identify risks and provide valuable information on areas for remediation. Investors also want to see more than a stack of cybersecurity policy documents. Yes, share your access control, incident response management and insider trading policies. But also be prepared to explain when they were last reviewed and revised and what specific changed were made. This shows investors that you understand your security policies are living documents and need to be adapted over time as your firm grows and transforms.  

2b. …and your organizational commitment to cybersecurity.

Investors also want to see that you’re executing a top-down approach to cybersecurity, and your senior management team is setting an example for the organization as a whole. How can you demonstrate this to your investors? Start by profiling your Chief Information Security Officer (CISO). What is his/her background in cybersecurity? Does he/she hold other roles within the company (e.g. Chief Compliance Officer, Chief Technology Officer, etc.). Having a designated advocate for the firm’s cybersecurity program will prove to investors that you take security seriously and are willing to dedicate time and resources to ensure your program is effective. Beyond the CISO, you should also highlight your Incident Response Team (IRT), which ideally is comprised of members of various departments. This, once again, demonstrates the full organization’s commitment to and involvement with the firm’s security posture.
Lastly on cybersecurity, your firm’s obligation to educate and train employees on cybersecurity preparedness is critical to address. Investors will be satisfied when you tell them that not only do your employees complete annual information security awareness trainings, but they also receive regular phishing simulation emails to test ongoing knowledge and receive companywide emails with IT security tips and best practice reminders. These are the types of initiatives that investors will remember and will alleviate their fears about cybersecurity.

3. Highlight your disaster recovery capabilities by sharing test schedules/results.

We know demonstrating preparedness is important to investors, but beyond cybersecurity, you should also be able to exhibit to your current and potential investors that your business can remain operational if a disaster strikes – and, in turn, that said investors’ assets will remain secure.
Disaster recovery systems and practices may vary firm to firm, but one way to prove that you’re prepared for the next disruption is to show investors that you’ve tested your systems. And not just once. Share your DR test schedule with investors, assuming you’ve stuck to your bi-annual testing schedule. And share the results. Have these planned downtime scenarios identified any risk areas that you’ve remediated? Have they forced you to evaluate other disaster planning scenarios? Barring any serious complications that have arisen, investors will be impressed to see that you’ve taken time to evaluate the findings of your recent DR tests and have taken active steps to minimize operational impacts.

4. Talk about the competition. (Yes, you read that correctly)

This one sounds a little controversial, but one way to impress investors is to come prepared to your due diligence meeting with a list of competitive differentiators. Think about the firms you are likely competing with for assets (they may match up in terms of AUM size, strategy, performance history, etc.), and highlight the areas where you feel you have a leg up. Whether you call them out by name or not, you are able to identify places where you feel your firm is best positioned for success, and investors will take note of that.

5. Address questions before they are asked.

If you really want to knock the socks off your investors, here’s a tip: answer their questions before they get a chance to ask them. Take the opportunity to lead the meeting yourself and come prepared to address all areas of your business, including, but not limited to: organizational background, financial standing, investment and performance history, operational practices, IT infrastructure and cybersecurity posture. If you’re able to answer an investor’s question before he/she asks it, you demonstrate a level of understanding of their needs and requirements and, thus, will better position yourself for a successful meeting.

For more hedge fund due diligence best practices, you might find these articles helpful:

hedge fund cybersecurity whitepaper

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