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Answer: An investor must use a comprehensive checklist to ensure that nothing is left out or omitted yet remain free to ask open-ended questions that provide insights into a firm's philosophy or culture.
## Explanation Option A is correct because it reflects Mirable's comprehensive approach to hedge fund due diligence. According to Mirable: - A **comprehensive checklist** is essential to ensure no important areas are overlooked - **Open-ended questions** are crucial to gain insights into the firm's philosophy, culture, and investment process - This balanced approach combines systematic coverage with qualitative assessment **Why other options are incorrect:** - **Option B**: Due diligence does NOT have diminishing marginal returns - thorough due diligence is essential for hedge fund investments, and quantitative analysis alone is insufficient - **Option C**: While hedge funds are less regulated than traditional investments, investors CAN report fraud to regulatory agencies like the SEC or CFTC - **Option D**: The investment strategy is highly relevant to due diligence as it determines the specific risks, operational requirements, and expertise needed Mirable emphasizes that effective due diligence requires both systematic coverage (checklists) and qualitative assessment (open-ended questions) to properly evaluate a hedge fund's operations, culture, and risk management practices.
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According to Mirable, which of the following is TRUE about hedge fund due diligence?
A
An investor must use a comprehensive checklist to ensure that nothing is left out or omitted yet remain free to ask open-ended questions that provide insights into a firm's philosophy or culture.
B
Due diligence is an activity with diminishing marginal returns which consumes the time of the fund's investment professions; therefore a potential investor is wise to limit the inquiry to a quantitative analysis which tends to be objective and fact-based.
C
Hedge fund are still largely unregulated and, unfortunately, anyone who feels that have been defrauded by a hedge fund cannot realistically report to a government agency as no single agency has jurisdiction.
D
Because due diligence is focused on the firm's risk management process, fund operating environment, business model and fraud risk, the investment strategy (e.g., equities, fixed-income, distressed) is largely irrelevant.