Low-Net Equity Fund: Deep Dive Part 3
Final installment in our walkthrough using a structured DD framework
In the previous posts (here and here), we introduced our hedge fund diligence framework and applied it to a real-world low-net equity fund, covering the first three categories. This final post concludes the analysis and presents the overall due diligence score.
Category 4: Team & Organization
Team Quality and Composition
The investment team is highly specialized in technology sectors, particularly semiconductors and hardware. Led by a seasoned PM with over a decade of experience in technology investments, the team includes:
A team of equity research analysts specialized in hardware technology sector
Senior advisors with decades of industry experience in semiconductors and electronics
Region-specific analysts with expert fluency in local languages for deeper industry insights
A quantitative research and data analytics team developing proprietary models and conducting extensive data analysis
Their bottom-up research process is strengthened by frequent field visits, thorough channel checks, and proprietary data systems.
Team Stability
The firm shows strong personnel stability, especially among key investment staff. There have been no senior departures in the past three years. Many senior operational and research staff have been with the organization for many years.
Alignment of Interests
The fund exhibits high alignment between investors and the investment team:
Team members have invested a significant portion of personal wealth into the fund, directly linking their financial outcomes with fund performance
Analysts manage dedicated portfolios within the main fund, creating accountability and encouraging long-term, fundamental-based decisions
Compensation is performance-linked yet team-oriented, reinforcing collaboration
Culture and Decision-Making
The firm culture fosters teamwork rather than relying on a single "star" manager. While the PM has final decision-making authority over their portfolio, regular investment discussions integrate insights from senior leadership, other PMs, and sector analysts.
Continuous improvement is central to the firm's culture. Longer-tenured employees typically rotate across multiple roles and manage diverse responsibilities, creating a versatile and cohesive team environment.
Succession Planning
Succession planning has been institutionalized, as evidenced by:
Previous smooth transition of PM responsibilities in 2017.
The investment team structure also promotes talent development and cross-training of senior analysts, ensuring internal capabilities to assume broader responsibilities when needed.
A deep bench of experienced analysts strengthens organizational stability, supporting a distributed knowledge base and long-term institutional continuity.
Overall Assessment: 5/5
The fund’s team and organizational structure are robust, demonstrating exceptional stability, deep industry expertise, strong alignment of interests with investors, and a culture that effectively balances collaboration with sole PM decision-making. The thoughtful integration of succession planning and personnel rotation across roles further strengthens the fund’s organizational resilience and adaptability.
Category 5: Operations & Business Quality
Overall Assessment: 3.5/5
The fund has strong operations and infrastructure. It runs smoothly across several offices, has full data backups, and keeps some of its assets outside the home region to reduce risk. Still, its main team and information edge are heavily based in one location.
Although the chance of a regional conflict is low, if it happens, the impact could be severe. The fund has taken good steps to manage this risk, but these measures can't fully mitigate the potential damage. This is the main reason for the lower score.
Due to the sensitive nature of this category, I'll refrain from sharing additional details. Instead, I've provided below my hedge fund operational due diligence checklist with key assessment areas and a sample of the questions I typically ask:
1. Compliance Oversight: Is the Chief Compliance Officer (CCO) independent from the investment team?
2. Trade Processing & Controls: Who is authorized to trade and how are permissions managed? How quickly are trades reconciled? Are triparty reconciliations in place?
3. Cash & Treasury Management: Are cash movements subject to dual approval?
4. Prime Broker & Counterparty Risk: How many prime brokers/exchanges are used, and are exposures diversified?
5. Technology & Infrastructure: What OMS/PMS systems are used—internal or vendor? Is there a tested cybersecurity and disaster recovery plan?
6. Valuation & NAV Controls: Who is responsible for pricing hard-to-value assets? Is there independent verification of the valuations?
7. Service Provider Quality: Reputation of key service providers: Fund Admin, Auditor, Legal Counsel
8. Regulatory & Legal: Is the firm registered with regulators like SEC or FCA? Have there been any past legal or regulatory issues?
9. Governance & Ownership: Who owns the management company—any external parties? Are key-person provisions embedded in fund terms?
10. Financial Resilience: At what AUM does the firm break even operationally? Has the fund needed outside capital to stay afloat?
11. Investor Base & Concentration Risk: What % of AUM comes from the top 5 investors? Could redemptions from any single LP create liquidity strain?
Category 6: Fees & Terms
Assessment Approach
For fees and access, we start from an industry standard baseline score of 3.5 (this baseline derives from our investment sizing framework, which I'll explain in future posts). This represents typical hedge fund terms (e.g., 2% management fee / 20% performance fee with standard liquidity provisions). We then adjust the score upward or downward based on how the fund's terms compare to industry standards. Keep in mind that standards vary across strategy groups—e.g. Multi-Strategy funds typically charge higher fees than standalone long/short equity funds.
Using this framework to assess the fund’s terms:
1. Management & Performance Fees → High Fees: -0.5
2% Management Fee / 20% Performance Fee. While common across multi-strategy or capacity-constrained funds, this pricing is on the expensive side for a pure-play long/short equity fund.
2. High-Water Mark and Hurdle → Neutral
The performance fee is governed by a rolling 3-year high-water mark. While this may appear investor-friendly at first glance, the rolling reset structure introduces some risk of “reset” behavior and misalignment during volatile periods.
This drawback is offset by the inclusion of a hurdle rate linked to the 1-year U.S. Treasury yield. Hurdles are uncommon for low-net equity L/S funds and provide a degree of return threshold discipline.
3. Liquidity & Investor Lock-Up → Neutral
The fund offers monthly liquidity with 20 business days' notice — this is better than standard for Asia-focused equity strategies, which often impose quarterly or semi-annual gates.
However, the fund imposes a 3-year soft lock with declining redemption fees (1.8%, 1.2%, 0.6%). This structure limits early redemption flexibility, especially in the context of rising interest rates and investor demands for shorter lock-ups.
Overall Assessment: 3.5 - 0.5 = 3
Fund’s fee and liquidity terms are slightly worse than industry standard for a standalone long/short equity strategy. While certain features like the monthly liquidity and presence of a hurdle are positive, they are offset by higher fees and restrictive redemption terms.
Category 7: Transparency & Capacity
Transparency & Investor Engagement → No Look-through: -1
The fund does not provide full portfolio transparency. While managers discuss holdings during calls, there is no formal look-through to individual positions.
The firm does maintain regular in-person and virtual meetings, and investor communications are professional and responsive, though documentation is still somewhat Asia-centric.
Custom reporting is not explicitly offered, though verbal transparency is relatively strong.
Though there is no direct access to analysts, PM is highly accessible.
Capacity Availability → Neutral
As of June 2025, the fund has AUM of ~$1.53B, with internal estimates suggesting strategy capacity of up to $3B. This implies ~50% headroom, giving allocators room to increase exposure without immediate concerns about dilution or crowding.
However, the strategy is single-sector focused (Asian semiconductors/hard tech), and sourcing short alpha in Asia at scale may become more difficult as AUM grows.
Overall Assessment: 3.5 - 1 = 2.5
Conclusion
The Fund demonstrates specialist alpha generation through deep sector focus, robust proprietary data infrastructure, and disciplined portfolio construction. The manager has evolved from running a high-beta, long-biased fund to managing a low-net, fundamentally driven strategy with superior diversification characteristics.
Regarding investments, the strategy aligns well with portfolio objectives, offering low correlation to equity indices and an idiosyncratic alpha engine centered on Asia's semiconductor supply chain. The fund has delivered strong performance over five years, with only one notable drawdown in 2023. This drawdown was well-contained and resulted from fundamental misalignment with sentiment-driven rallies—a common challenge in fundamental equity long/short investing.
The investment process is highly institutionalized, featuring integrated quant overlays, robust credit analysis, and a culture of continuous improvement. Operationally, the firm meets institutional standards, though its Taiwan base creates geopolitical tail risk. The fund's terms are somewhat investor-unfriendly (3-year soft lock, 2/20 fee structure), and transparency is limited with minimal portfolio look-through. Nevertheless, the fund has ample capacity, and its growth has primarily come from performance rather than capital inflows.
While the PM transition and regime change initially made this fund appear less attractive, it remains a non-consensus opportunity for allocators willing to accept some structural friction in exchange for high alpha potential and specialized domain expertise. It best suits hedge fund portfolios seeking sector diversification in hard tech/semiconductors and with the governance framework to manage geopolitical tail risk.