Six Critical Questions to Be Addressed by Hedge Fund Managers That Outsource Employee Background Checks (Part Three of Three)

This is the third installment in our three-part series on employee background checks in the hedge fund industry.  This article begins by weighing three factors favoring conducting background checks in-house against five factors favoring outsourcing of background checks.  The article then identifies and addresses six important questions to be answered by any hedge fund manager that outsources the employee background check process.  The first article in this series outlined the imperative of conducting background checks, cataloging the wide range of regulatory and other risks presented by employees.  See “Why and How Should Hedge Fund Managers Conduct Background Checks on Prospective Employees? (Part One of Three),” Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013).  And the second article in the series discussed the mechanics of conducting a background check, identified three common mistakes made by hedge fund managers in conducting background checks and detailed four legal risks in conducting background checks.  See “Why and How Should Hedge Fund Managers Conduct Background Checks on Prospective Employees? (Part Two of Three),” Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013).  The backdrop for our discussion of backgrounds is the growing competition for top talent in the hedge fund industry.  In brief, assets under management by hedge funds are growing rapidly; Citi Prime Finance, for example, forecasts that institutional investment in hedge funds will reach $2.314 trillion by 2017, up from $1.485 trillion in 2012.  Managers that can attract and retain the best and the brightest are more likely to capture a larger slice of a growing pie.  See “How Can Hedge Fund Managers Use Profits Interests, Capital Interests, Options and Phantom Income to Incentivize Top Portfolio Management and Other Talent?,” Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).  Also, insightful investment talent can enable a manager to explore creative structuring options such as alternative mutual funds, funds of one and reinsurance vehicles.  The opportunities can cause a manager to rush headlong into the market for talent, and at least one of the purposes of this series is to suggest that managers pause to separate the peccadilloes from the fundamental problems.  Before you can know your customer, you need to know your employees.

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