To those that joined a HF startup in Special Sits / Multi-Asset: what was your DD process?

Based on the most helpful WSO content, here are some key considerations and due diligence (DD) steps when evaluating whether to join a startup hedge fund in Special Situations or Multi-Asset strategies:

1. Belief in the PM's Ability to Deliver:

   • Assess the Portfolio Manager's (PM) track record, not just in terms of returns but also their ability to navigate different market cycles.
   • Look for evidence of their ability to generate alpha in the specific strategy they are pursuing.
   • Evaluate their reputation in the industry and whether they have a history of attracting and retaining capital.

2. Stickiness of Capital:

   • Understand the nature of the fund's initial capital. Is it from a single seed investor, or is it diversified across multiple investors?
   • Determine how "sticky" the capital is—whether the investors are committed for the long term or if they can redeem quickly. A single investor with a light commitment can be a red flag.

3. Compensation Structure:

   • Ensure that compensation is tied to performance in a transparent manner, either through your own contributions or the overall fund's success.
   • Avoid setups where compensation is entirely discretionary, as this can lead to misalignment of incentives.

4. Fund Infrastructure and Resources:

   • Evaluate the operational setup of the fund. Does it have the necessary back-office, compliance, and risk management infrastructure to scale?
   • A lean setup is common in startups, but there should still be a clear plan for growth and operational stability.

5. Alignment of Vision and Strategy:

   • Ensure that the PM's strategy aligns with your own investment philosophy and interests.
   • If the fund is pursuing Special Situations or Event-Driven strategies, assess whether the PM has a clear edge in sourcing and executing these deals.

6. Market Opportunity:

   • Consider whether the fund's strategy is targeting a niche or inefficiency in the market that larger funds cannot exploit.
   • For example, smaller funds often thrive in less liquid opportunities where mega funds cannot deploy capital effectively.

7. Risk Tolerance and Personal Situation:

   • As you mentioned, being young and without significant personal obligations gives you the flexibility to take on higher risk.
   • However, ensure that you are comfortable with the potential downside, including the possibility of the fund failing.

8. Public vs. Private Markets:

   • Public markets can indeed be more competitive and efficient, but they also offer greater liquidity and transparency.
   • Private markets may provide more control and less competition, but they often require deeper due diligence and longer investment horizons.

9. Cultural Fit and Team Dynamics:

   • Assess the culture of the fund and whether you see yourself thriving in that environment.
   • A startup fund often requires wearing multiple hats, so versatility and a collaborative mindset are key.

10. Exit Opportunities:

    • Consider the potential exit opportunities if the fund does not succeed. Will the experience and skills you gain be transferable to other roles in the industry?

In summary, your DD process should focus on the PM's track record, the fund's capital base, alignment of strategy, operational setup, and your own risk tolerance. Joining a startup hedge fund can be a high-risk, high-reward move, but with thorough due diligence, you can maximize your chances of success. If you're confident in the PM and the strategy, and you're prepared for the potential downside, it could be a great opportunity to grow and learn in a more entrepreneurial setting.

Sources: Special Situations Investing (BX, Apollo, Ares), Joining Start Up Hedge Fund - What to Expect, What should I know before starting a Hedge Fund?, https://www.wallstreetoasis.com/forum/hedge-fund/the-future-of-special-situations-distressed?customgpt=1, Q&A - 3rd Year HF Analyst at Special Situations / Event-Driven Fund