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ARTICLE · 09 MAY 2007

Hedge Fund Due Diligence: A US Litigator’s Perspective

Nixon Peabody
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Litigation, by its very nature, is backward looking.Trial counsel act as legal archeologists, attempting to determine what went wrong and when.Thus, litigation offers a unique opportunity to examine, with 20/20 hindsight, the issues and actions that led to failure.

United StatesFinance and Banking

By Jonathan Sablone and Timothy W. Mungovan1, Nixon Peabody LLP

Reprinted from the International Investment & Securities Review 2007

Litigation, by its very nature, is backward looking. Trial counsel act as legal archeologists, attempting to determine what went wrong and when. Thus, litigation offers a unique opportunity to examine, with 20/20 hindsight, the issues and actions that led to failure. With this information, litigators can offer tangible steps and strategies to avoid a recurrence. In some respects, litigation can be analogised to the "black box" on an aircraft – the information is of no benefit to the current victims, but immensely valuable to avoid future disasters.

This model of litigation as a risk management tool has special application to hedge funds. Most hedge funds offer little transparency into their investment strategies or operations. In addition, there have been a number of high profile blow-ups and failures in the past few years and there is no reason to

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