Doing Due Diligence

An experienced due diligence questioner knows how to probe for a trading advisor's weak spots. Take Fred Gehm, a consultant to trading advisors and hedge funds. Among the questions he asks is whether the trader has made any trades or investments that are not reflected on his disclosure document. If so, why not? Gehm says he subscribes to the old reporter's motto, "If your mother says she loves you, check it out." Unless the trading advisor has a solid economic reason for excluding a trade or trades, a reason that was documented beforehand, he argues that the only prudent assumption is that those trades lost money.

Gehm also asks: Who is your accountant? Who is your auditor? "If they are not firms you know and trust, find out who they are or walk. Even if you know who they are, that doesn't mean they actually did the work. Call and check."

The questions get tougher. Why should I invest with you? Why should I believe what you just said? "An investor's working assumption should always be that the person on the other side of the desk is a fool or worse," says Gehm. He says it's the trading advisor's job to convince the investor he's wrong. It's the investor's job to think through the advisor's arguments, find the evidence that both supports and refutes these arguments, weigh the results and make a decision."