Hedge Fund Due Diligence at Leman Alternative Asset Management Company Harvard Case Solution & Analysis

Summary of Case
Leman Alternative Asset Management Company is a fund of hedge funds that is known for alternative investments, it has adopted a research driven approach for constructing the diversified portfolios of the hedge funds for the investors, and it monitors its portfolios by utilizing the advanced risk analytics. Thierry Michaud was the senior vice president for Leman Alternative Asset Management Company and he had just received the prospectus for Fair Field Guard Ltd hedge fund.
As Michaud was a derivatives expert therefore, it was his job to perform a detailed analysis and due diligence for the new hedge fund and then present a recommendation to the investment board meeting next day. The Fairfield Guard hedge fund utilized an option strategy that was known as a collar or split strike conversion. The past performance of this hedge fund had been stellar. The monthly return volatility of the hedge fund was much lower and the monthly returns were significantly higher as compared to the returns of S&P500.
Hedge Fund Due Diligence at Leman Alternative Asset Management Company Harvard Case Solution & Analysis

Michaud had to now perform the due diligence over this new hedge fund and it was highly important to backtest the collar strategy and determines the total value that had been added by the BLM Investment Securities to the hedge fund. Michaud was intrigued that how a collar strategy can generate such huge returns and thus it was important to backtest the collar strategy and make a final recommendation to the board of Leman Alternative Asset Management Company.
Analysis
First we begin the description about hedge funds and state the reasons for conducting due diligence at Fairfield Guard.
Hedge Funds Description & Due Diligence of Fairfield Guard
A fund of hedge funds is an alternative investment vehicle that is available to the sophisticated vehicles such as the individuals and institutions with significant assets. Hedge funds are a pool of underlying securities and they can invest in many different types of securities. However, the US Securities and Exchange Commission do not regulate the hedge funds but it appears that the regulations and rules for hedge funds might be developed soon.
Hedge funds can invest in a wider range of the securities as compared to the mutual funds because they are unregulated. Most of the hedge funds invest in the traditional securities such as bonds and stocks however; hedge funds of today are mostly investing in more risky and sophisticated investments and techniques. These techniques include the long short strategies and the short positions with borrowed money. Most of the hedge funds also invest in derivates, as is the situation in this case.
It is highly important to do due diligence on Fairfield Guard fund because the fund uses a collar strategy for managing its portfolios. Collar strategies are usually risky strategies and do not generate higher returns as compared to other strategies. For instance, the Fairfield Guard fund had generated returns higher than S&P 500 and the losses for the fund have never exceeded -1%, which is quite remarkable. The Sharpe ratio for the hedge fund was also much higher due to its lower volatility.............

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