Questions to Ask a Fund Manager: A Plain-English Due Diligence Guide

Due diligence is the process of gathering information and asking questions so you can understand a fund, its manager and its risks before making any decision. With a private fund, that usually means looking closely at the people, the strategy, the structure, the costs and the paperwork.

Questions to ask a fund manager commonly fall into a few themes: background and experience, how the strategy works, how the manager is paid, how risk is handled, how and when money can be accessed, and how information is reported to investors.

Private fund investments are speculative and illiquid and can lose all of their value. Because of that, many people find that asking thoughtful questions early helps them understand whether a fund fits their circumstances, or whether it is not a fit at all.

Traditionally, people have approached manager due diligence by reading the offering documents carefully, meeting or speaking with the manager, and asking follow-up questions in writing so answers are on record.

Many also speak with their own attorney, accountant or financial adviser, ask for references, and look at publicly available regulatory filings about the manager. Some compare how several managers answer the same set of questions.

Eligibility is another early step. Private offerings are often limited to accredited investors under SEC Rule 501(a). Offerings under Rule 506(b) cannot use general solicitation, while Rule 506(c) allows general solicitation but requires that all purchasers be accredited and that the issuer take reasonable steps to verify that status. Any offering is made only by the issuer through its own offering documents.

The right fund due diligence provider or independent fund manager may help you organize your thinking. A first conversation is generally a chance to explain your goals and comfort with risk, and to hear how the manager describes their approach in plain language. It is not a sales pitch, and you are never obligated to act.

Questions people often bring include: What is your background and how long have you managed this kind of strategy? How does the strategy work, and what could cause it to struggle? How are you compensated, and what fees and expenses does the fund bear? How are conflicts of interest handled? Who audits the fund, and who holds the assets?

You might also ask about liquidity and reporting: When, if ever, can I access my money? What happens in a difficult market? How often will I receive updates, and will I receive a Schedule K-1 for tax reporting? Past performance does not guarantee future results, so it helps to focus on process and transparency. Please consult your own licensed advisers about your situation.