DUE DILIGENCE REGARDING ALTERNATIVE INVESTMENTS
An extremely fragile investment industry was dealt another blow when it was announced that Bernard Madoff , the former NASDAQ chairman, was charged with one count of securities fraud. He has admitted to defrauding clients for up to $50 billion in a massive Ponzi scheme, in which investors were payed returns out of the money received from subsequent investors rather than from profit.

This substantial case of alleged fraud will undoubtedly add to investor scrutiny stemming from the current financial crisis and lack of regulation/transparency of alternative investments. It will not be unusual for investment advisors to encounter increased contact from their investors with legitimate inquires as to the policies and procedures in place to safeguard their alternative investments from potential fraud. In addition to investment advisors, nonprofit boards may be pressured to provide increased documentation and support for the due diligence completed on their alternative investments.

The time is ripe for both investment advisors and nonprofit boards to review their current due diligence policies and procedures so they may be prepared for investor and donor inquiries.

Following are some key actions regarding alternative investments which should be considered and evaluated:

Create a documented policy of initial due diligence which includes specific steps that must be addressed before the execution of an alternate investment. Procedures may include evaluation of the investment manager, review of historical performance, valuation procedures and reference checks.

• Evaluate alternative investments on an on-going basis, via a documented process which is included in a procedural manual. Procedures may include on-site visits with the alternative investments’ management team and reviewing audited financial statements.

• Investment policies should be well documented and approved by the Board of Directors or an equivalent committee. Actual investments should be regularly evaluated against this policy. Such reviews should be conducted at least annually.

• A policy for the valuation of alternative investments should be well documented and followed when performing monthly, quarterly and annual valuations.

• At least annually, an assessment of the alternative investments’ service providers should be conducted. A non-inclusive list would be service providers that provide the following services to the fund: administration and accounting, legal and audit and tax, custodial and trading (clearing) services. All should have appropriate industry experience and have the highest caliber of peer review conducted (when available).

The above listings are not all inclusive but can act as a starting point when assessing your current procedures and compliance. Cohen Fund Audit Services has extensive experience providing audit, tax and consulting services to alternative investment funds such as hedge funds and their investors and would be happy to offer assistance. For more information, please call 440.835.8500 email us at inquiries@cohenfund.com.