August 22, 2014
Article by Maury Cartine, Partner-in-Charge of Marcum's National Alternative Investment Industry Group Tax Department, "Things Aren't Always What They Seem," Featured on HFM Week
By Maury Cartine, Partner-in-Charge of Marcum's National Alternative Investment Industry Group Tax Department
A few years ago my big day finally arrived! My wife wanted me to have something special and she picked out the Bentley GTC. I was thrilled to own a classic automobile. However, soon after purchasing the quintessential British luxury vehicle, I learned I was in fact mistaken. The Bentley was manufactured by Volkswagen! After a little more due diligence, I discovered that my very own everyday car, the Honda Pilot, had a more advanced sound system than the Bentley. So what does all this have to do with investment managers? It is simple; our failure to exercise proper due diligence in selecting an investment manager can have severe consequences that go well beyond choosing the wrong car. As any former Madoff investor can tell you, the wrong choice can be catastrophic!
The vast majority of investment managers are hardworking individuals who take pride in what they do and act with integrity. The results of each manager will vary and the choice of managers may ultimately be the wrong choice for an investor anyway. However, nothing is worse than picking an investment manager who is dishonest from the get-go, prone to dishonesty when the going gets tough, or simply too distracted to be effective. After more than 25 years of working with start-up funds and seeing them through many years of operation, I have learned quite a few things about investment managers. Among those things are the danger signals that if ignored, can lead to a bad choice for an investor and our firm as a service provider. Let’s take a look at some of the more important danger signals that investors and fund of funds managers in particular, should watch out for.
Investment managers frequently meet with us to discuss the new funds they are launching. We listen carefully to the service providers that are being selected by the investment managers. We want to see choices that make sense to us with respect to the selection of legal counsel, administrators, prime brokers and auditors. If the names of these service providers are not easily recognisable by us as having industry expertise, we make note of our first danger signal. If the competence level of the service providers is less than we think it should be, we know that mistakes in the valuation of assets and the performance of the fund can occur. We also know that less seasoned service providers may fail to recognise the danger signals that are important to them.