The aim of the book is to provide practical guidance for the investor when compiling due
diligence and deciding on an investment or against it. The focus of the book lays on the risk
assessment and due diligence. It captures fund s internal and external risks and the investment
style specific risks. The aim is to provide sound guidance to the alternative investment fund
selection. The UCITS 3 directive widens investment tools for the traditional asset managers by
allowing short selling of securities and diminishing the gap between the traditional and the
alternative asset management industry and attracting traditional managers to the alternative
investment universe. The author concentrates on three categories: Relative Value and Market
Neutral Event Driven and Opportunistic alternative investment funds. Whilst the industry is
generally categorized into certain fund types it has to be stated that every fund is different
and will have different risk attributes. Within the specific categories major risks will be the
same as the exposure towards the specific underlying will be similar. Still every single fund
has to be examined on its own in detail as it will have the specific alpha generating
competitive advantage. Thus the author suggests a pre-selection of the potential fund manager
or the management team by analysing the team and the fund s performance first. The analysis
goes through the quantitative figures and the qualities of the management team. Detailed
knowledge about the strategies and its fit into the portfolio is worthless unless the investor
is able to select the performing manager. Without that skill the probability of ending up with
an underperforming alternative investment fund or a blow-up is huge. The analysis of the
management team qualities shows behaviour patterns helping to detect management teams which
are tending towards moral hazard. Secondly the alternative investment fund style specific
risks are examined. The author gives an overview over major risks per investment style. The
specific investment style risk depending on the combination of the major risks can be a warning
sign for the future performance. Thirdly the fund s internal and external risks are analysed.
The internal risks are directly connected to the management team and its operations. The
external risks are diverse outside factors influencing the fund s performance e.g. the
industry and the macroeconomic risks. The risk profile is categorized in five levels thereof
the level five is marked as a red flag and automatically falls out of the investment focus. The
level one two and three are favourable investment targets while the level four should be
preferably avoided or at least further examined before the final investment decision is done.
The alternative investment funds seem to be more an opportunity than a risk for those who can
accomplish thorough due diligence selecting the funds which will deliver the superior
risk-adjusted return. The investor should seek to know as much as possible and obtain
information about the factors which are beyond the manager s control. To invest is an art
based on the skill and the experience. There is no perfect model to rely on. The business is
based on logical and reflexive thinking as well as the strong interpersonal relationships. This
foundation creates the conditions to succeed for both the manager and the investor.
