Hedge Fund Reference Checks: How to Verify Who You're Trusting With Money
Chapter 11 opens with a Reagan quote, “Trust but verify.” That pretty much sets the tone. You have spent hundreds of hours doing investment, operational, and risk due diligence on a hedge fund. But have you actually checked whether the people running it are who they say they are?
Travers argues that most firms do reference checks wrong. They save them for the very end. By that point, you have invested so much time and effort that you are psychologically biased to minimize whatever issues come up. Here’s the thing, if a reference check blows up at the end, you just wasted weeks or months of work.
His fix is simple: start making reference calls early. Do a few right after your first interview with the hedge fund manager. Then do more after your first onsite visit. This way, if something ugly surfaces, you find out before you are too deep in.
Onlist vs Offlist References
Every hedge fund manager has a ready-made list of people who will say nice things about them. These are onlist references, people the manager has pre-approved and asked to speak on their behalf. Naturally, these references will lean positive. Why would a manager put someone on the list who would trash them?
Offlist references are people you find on your own. And Travers considers these far more valuable.
But here’s the thing, do not skip onlist references just because they are “friendly.” Travers says he always calls every single one, and sometimes he gets surprising results. He has called onlist references who had no idea they were on the list. Some had not spoken to the manager in years. A few even gave negative reviews. You simply do not know what you will get until you pick up the phone.
Also, onlist references are a great source for finding offlist ones. Every time you talk to someone, ask them who else you should speak with. A former co-worker can often give you five more names right on the spot.
One important detail: when a manager with 15 years of experience at three firms hands you a list of only three references, ask yourself why it is so short. Sometimes the most telling thing is not who was listed, but who was left off.
Internet and Social Media Research
Before you even pick up the phone, hit Google. Search for each person at the hedge fund, but be smart about it. Do not just type “John Smith” and expect useful results. Add the firm name or a unique keyword, like “John Smith” + “Excelsior Capital.”
Try every variation of their name. “Alexander Smith,” “Alex Smith,” “A. Smith.” Check the news tab too. Set up Google Alerts for the firm name and the names of key people so you get notified whenever they pop up in the news.
Travers also recommends building a detailed biography for every person you are reviewing. Schools, certifications, previous employers, titles, published papers, conference appearances, everything. Then use that bio to cross-check what you find online. If someone’s conference bio from ten years ago says they went to a different university than what their current presentation says, you have a discrepancy worth investigating.
LinkedIn gets a big mention here. Travers calls it nearly indispensable for finding offlist references. You look up the person, verify their profile against the bio you built, then click through their previous employers. LinkedIn shows you who else worked at the same place during the same time period. Instant list of potential offlist references. He says nine out of ten people he reaches out to on LinkedIn respond within a week.
And a word of caution: anything people post publicly online, vacation photos, book reviews, political rants on Twitter, all of it can be found by a determined researcher. Travers has found some entertaining stuff during deep internet searches.
How to Actually Conduct the Calls
There are two schools of thought. Some people call references cold, hoping to catch them off guard and get raw, honest answers. Travers does not like this approach. He finds that ambush calls often backfire, making people defensive and giving you more guarded answers.
Instead, he emails the reference in advance to explain why he is calling and to schedule a proper time. This way the person has set aside enough time for a real conversation.
Who Should Make the Calls?
Here’s the problem with how most firms handle this: they hand reference checks off to junior analysts or administrative staff. Travers thinks this is a mistake. Reference checking is one of the hardest types of interviewing. People are naturally inclined to say positive things or say nothing at all. It takes experience to pick up on what is not being said.
Think about it. If you are calling a 20-year veteran portfolio manager as a reference, do you really want a junior analyst representing your firm on that call? The person leading the due diligence effort should be making these calls. They know the details, they know what questions to ask, and they will instinctively spot a weak or dishonest answer.
A key technique: do not put words in people’s mouths. Instead of asking “Do you agree that John’s modeling skills are his greatest asset?” ask “What is John’s edge?” Let them tell you. If you tip your hand first, the reference will just mirror your views back at you.
Problem References
Not every call goes smoothly. Travers identifies four types of difficult references:
The Stonewaller - will not share anything meaningful. Be patient, stay friendly, and remind them how important this is. Assure them everything stays confidential.
The Politician - dodges your questions by steering the conversation somewhere else. If you ask about John’s relationship with his boss Michael, and they talk about his relationship with everyone except Michael, push back. That dodge itself is valuable information.
The Evader - never responds to your outreach. For onlist references, ask the manager to nudge them. For offlist, be persistent but not annoying. Call them directly, because it is harder to ignore a phone call than an email.
Negative References - these happen. When they do, take the time to fully understand the issues. Let the person know that their feedback could result in you declining the investment. Ask if they have personal grudges. A former boss might give a negative reference not because the manager is bad, but because they were personally offended when the person left to start a competing fund. You need to dig deeper with other references to figure out what is really going on.
How Many Calls Are Enough?
Travers uses a reference scorecard. Each reference gets scored on four criteria: relevance (how independent and knowledgeable is this person), character, experience, and evaluation (is this person an alpha generator, hard worker, leader). The character, experience, and evaluation scores are multiplied by the relevance score, so a reference from someone’s brother-in-law counts less than a reference from an independent former colleague who worked alongside them for ten years.
His rule of thumb: when the total score across all references exceeds 500 points, he is generally comfortable. That works out to roughly seven references with strong scores.
Background Checks
Beyond reference calls, Travers recommends hiring third-party investigative firms to run formal background checks on senior people. These firms dig through educational records, employment history, criminal records, litigation history, regulatory filings, and more. It is not cheap, so you typically only do it for the key decision makers, the partners and senior managers.
The FCM Example
The chapter ends with two actual reference summaries from the book’s running example, Fictional Capital Management.
Jonah Kellworth (former boss at GCH) was hard to reach and openly salty about Ted, Jaime, and Bill leaving his firm to start their own fund. But even he admitted they were very good analysts and that performance was strong when they co-managed. He just could not get past the fact that they left.
Arty Gellberg (day-one investor with $2.1 million in the fund) was far more enthusiastic. He called Ted the best analyst he had ever recruited, praised his ability to see through corporate smoke screens, and noted his natural skepticism made him great at finding short ideas. He flagged concentration risk as the fund’s main weakness, but said he personally was fine with it because he has a long time horizon.
Interestingly, Arty mentioned that FCM had hired a consultant in 2008 to help with financial sector analysis, something Ted and Jaime had never mentioned in their own interviews. That goes on the follow-up list.
My Take
This chapter drives home a point that applies way beyond hedge funds: the people you trust with your money deserve more scrutiny than a quick phone call at the end. Start early, go deep, and pay attention to what people do not say. Travers’ system of scoring references and building detailed biographies is practical and repeatable. And his advice about using LinkedIn to systematically find offlist references was probably ahead of its time when the book came out.
The Jonah reference is a perfect example of why you dig deeper. On the surface, it looks like a lukewarm-to-negative reference. But when you understand the context, it is actually a former boss who is still bitter about losing good people, and even he could not say anything bad about their investment skills.
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