You’ll often hear NFL coaches’ breakdown the regular 16 game season into four quarterly parts.
By breaking down the football season into four parts, NFL coaches believe that they’re better able to assess their teams play over measurable chunks to implement the inevitable changes that will have to be made as the season goes through its different phases.
For those coaches, breaking down the football season into separate parts helps improve the process of managing a football team.
I think the NFL approach is a good one to emulate when thinking about the hedge fund investment process.
The hedge fund investment process can be also be broken down into four distinct parts.
First: Due Diligence
The first phase of the hedge fund investment process usually consists of investor due diligence on a manager and their fund product.
Second: Negotiation
Assuming that an investor decides to move forward, the second phase is the negotiation phase of an investment.
It’s usually during this second phase that final deal documents are executed, a side letter agreement between a manager and an investor is struck and money is wired into a fund.
Third: Monitoring
Once an investment has been made into a hedge fund, we enter into the monitoring phase of the investment process.
A manager is investing a fund’s proceeds, while investors and their advisors are monitoring the results of that investment program.
This phase can be relatively long or short depending on the results of fund and other factors impacting an investor or manager.
Fourth: Exit
Fourth is the investment exist phase when an investor looks to pull their money out of a hedge fund for a variety of reasons. Like the investment monitoring phase, the fund exit phase can be relatively long or short depending on the circumstances.
Now in reality, many times the hedge fund investment process is not so clear cut and different phases can blur together. The process of due diligence on a manager or their fund product can continue long after an investment is made.
However, I do think that breaking down the overall hedge fund investment process into these four distinct phases is productive by helping investors isolate risk over the entire investment cycle.
By breaking down the overall investment process into these distinct phases, an investor is better able to isolate hedge fund term risk and where it may spring to life.
This helps answer a critical question: Can an investor live with a particular hedge fund term, seek to modify it, or simply not make the investment?