The Essentials of Due Diligence Verification
Key Takeaways for Investors
Due diligence verification is the discipline of independently confirming every material claim a fund manager makes through third parties, document reviews, and direct conversations rather than relying on what the marketing deck or PPM states.
The five areas that matter most are physical location and cash controls, background checks, investment strategy alignment, performance attribution, and counterparty/service-provider confirmation.
The biggest red flag in alternative investments is not a bad number; it is a manager who will not let you verify the number. If transparency is refused, the right response is usually to move on.
The Madoff fraud was identifiable through verification failures, specifically, the inability to confirm options counterparties and clearing relationships.
A complete Due Diligence Questionnaire (DDQ), such as the free ILPA template, is the structural backbone of any serious verification process.
What Does "Verification" Actually Mean in Alternative Investment Due Diligence?
Verification is the process of taking everything a manager has told you, the strategy, the performance, the counterparties, the controls, and independently confirming it through a source the manager does not control. It is the difference between being told something and knowing it.
Investors will read a Private Placement Memorandum cover-to-cover, study a track record, and run reference calls with people the manager introduced, and call that diligence. It is not a complete due diligence process. Because none of those steps confirm that the manager's description of the business is true.
“I tell you what I do, and then how do you know I’m telling you the truth? You don’t. So you’ve got to find a way to create an independent verification process.”
Why Skipping Verification Is the Most Expensive Shortcut in Alts
The cost of failing to verify shows up in three layers, in order of severity.
The first is strategy drift you didn't sign up for. PPMs are often written with significant latitude. Without a granular walk-through of actual trades, you cannot see when a manager has wandered into exposures the marketing deck never mentioned.
The second is risk you cannot see in the headline numbers. Performance can be carried by exposures the manager has no specific skill in, or a lucky factor bet, a single concentrated position, a leverage decision the offering documents allowed but never highlighted. You wake up a year and discover you own something you did not expect to own.
The third, and rarest, is fraud. It is rarer than the financial press suggests. But it is also the case where the lack of a verification process turns a recoverable disappointment into a permanent loss of capital.
The Five Areas Every Investor Must Verify
1. Physical Location and Cash Controls
Post-COVID, fewer firms have a single office. Traders, portfolio managers, and operations may sit in different cities, sometimes different countries. A traditional "office visit" is not always possible or even informative.
What still matters is who can move money, how they can move it, and how that process is secured. Specifically:
Are wire transfers protected by dual control?
Is wire activity executed from a dedicated, access-restricted machine?
Where do the key persons physically sit, and can you meet them in person if possible, video if not?
Some funds run wire activity from a single computer in a locked room. Not every firm needs to go that far, but understanding the mechanics tells you whether operational discipline is real or theoretical.
2. Background Checks
Two distinct verifications matter here:
The backgrounds of the key people running the firm. Ask for these directly. A reputable manager will share them or arrange access.
The firm's own process for background-checking employees . Understand the policy, and see the files. You are testing whether the firm runs the discipline, not collecting personal data.
If a manager pushes back hard on sharing key-person background checks, that is information.
3. Investment Strategy Alignment ("Say vs. Do")
This is where, in my experience, most problems first show up and not in the audited financials, not in the operations review, but in the comparison between what the manager says they do and what the actual positions show they are doing.
Sit with a portfolio manager or trader and walk through the full life of a trade: idea generation, analysis, sizing, execution, ongoing monitoring, exit. For a private credit fund, ask to see the loan tape and walk through individual loans. If the granular trade-level reality does not match the strategy described in the PPM, the marketing deck, and the interviews that is your answer.
If a manager will not show you the underlying detail, our standard practice is to thank them for their time and move on. There are always other investments.
4. Performance Attribution
Once you have walked through the trades, the performance numbers become verifiable. The question shifts from "is the track record real?" to "does the timing and shape of returns match the trades I just saw?"
Mismatches can be large gains in periods where the trades you reviewed could not plausibly have produced them, or smooth returns in markets where the strategy should have shown volatility are strings worth pulling on hard.
5. Counterparties and Service Providers
This is the highest-leverage verification step, and the one most commonly skipped.
Funds touch a long list of third parties: fund administrator, auditor, tax counsel, prime broker, custodian, banks, leverage providers, securities counsel. Each one is a check you can call.
The mechanic: ask the manager to send an email to each provider, with you copied, authorizing a verification conversation. Then call. The questions are simple:
Do you work with this fund?
How long?
What functions do you perform for them?
At what cadence?
We have run this process and discovered more than once that service providers a manager claimed to "work with" had no record of the relationship. That is not a misunderstanding. This is a manager you do not invest with.
What the Madoff Case Tells Us About Verification
Bernard Madoff's fund is the most-studied alternative-investment fraud in modern history, and the verification failures around it are instructive.
Investors I knew personally who visited the operation asked to walk through the split-strike conversion options trades that supposedly drove returns. They were given high-level descriptions, no trade detail, and when the fund was pressed, the due diligence teams was politely escorted out. One group was told outright: "I just don't think this is an investment for you. You're not quite understanding what we do."
The deeper verification failure was at the counterparty level. Investors who tried to confirm who was clearing the options trades given the size Madoff claimed to be running found that the two largest options clearing houses could not, or would not, confirm meaningful business with the fund. The trades that supposedly produced the returns had no infrastructure footprint anywhere in the market.
The lesson is not that fraud is common. It is not. The lesson is that the absence of verifiable counterparties is itself the signal, often visible long before the collapse.
Take the framework with you. Chris's full deck — The Essentials of Due Diligence Verification — together with a working list of the questions to ask any alternative-investment manager, is available as a free download. Use it as the working document for your next manager call. Download the deck and verification questions.
Due Diligence Non-Negotiables
A short list of items that, in our process, are not negotiable:
A complete Due Diligence Questionnaire from the manager. The ILPA DDQ template is free and widely used. A manager who cannot produce one avoided unless it is an emerging manager with no institutional asset management background.
Authorization to contact named service providers. Not allowing the verification process.
Trade-level transparency sufficient to walk the life of a trade and tie performance back to it.
Key-person background checks on the people running the firm.
Clear cash-control documentation, who can move money, how, with what controls.
Lack of third-party oversite via Fund administer and auditor.
If a manager cannot, does not, or will not provide these we have our reason for a “no.”
Chris has recorded a follow-up short video that walks through how to develop your own non-negotiables list — what belongs on it, how to apply it, and when to bend versus walk away. Here’s the link.
How We Think About Verification at Kirkland Capital Group
At Kirkland Capital Group, our standard practice is to make verification easier, not harder, for investors evaluating the Kirkland Income Fund. The operational, structural, and counterparty checks described above are not a hurdle for a prospective LP to clear they are the part of the process we expect serious investors to test, and that we have built the Fund to withstand.
In practice, that means a few specific things:
A complete Due Diligence Questionnaire is available on request, covering strategy, structure, controls, reporting, and service providers.
Walk-throughs of the loan tape with the underwriting team, where investors can review individual loans, LTV calculations on as-is value, and underwriting rationale.
Direct introductions, with written authorization, to our service providers — fund administrator, auditor, legal counsel, banks so investors can run independent confirmation calls of the kind described in this article.
Access to the governing documents such as the PPM and operating agreement so any commitment we make in conversation is traceable to language in writing.
We run our own loans, our own underwriting, and our own service-provider relationships through the same lens we apply to any manager we evaluate. From our perspective, the operational, structural, and counterparty checks are as important as the assessment of the investments and the returns because operational discipline is the hidden driver of private-fund success, and it only shows up under verification.
If you don't understand how an investment works, you won't understand how it breaks. Verification is how you find out.
Final Thoughts
Verification is not glamorous. It is phone calls, document requests, signed authorizations, and follow-up emails. It is the part of diligence that doesn't generate a thesis or a returns forecast.
It is also the part that most reliably keeps capital out of the wrong investments. Build the network, ask for the DDQ, run the calls, walk the trades, confirm the counterparties — and if any of those steps is refused, treat the refusal as the reason to say, “no.”
Frequently Asked Questions
Q: What is due diligence verification in alternative investments? A: Due diligence verification is the process of independently confirming every material claim a fund manager makes about strategy, performance, controls, and counterparties. It uses third-party sources such as auditors, fund administrators, custodians, background checks, and direct trade-level reviews rather than relying on the manager's own marketing materials or PPM.
Q: How do I verify a fund's performance numbers? A: Verify performance in two layers. First, walk through individual trades or loans with the team to understand what was actually done. Second, ask the fund administrator and auditor to confirm the reported figures and the timing. The trade-level reality and the third-party records should match the headline track record.
Q: What should I do if a fund manager refuses to let me verify something? A: Treat the refusal as a primary signal. From our perspective, a manager who will not authorize service-provider calls, will not show trade detail, or will not produce a Due Diligence Questionnaire is telling you something important. There are always other investments; the cost of moving on is almost always lower than the cost of investing without verification.
Q: Do I need to visit a fund's office in person? A: Not always. Post-COVID, key people often sit in different locations, and video calls plus screen-shares can replicate much of an on-site visit. What matters is meeting the key persons, walking through cash controls and operations, and confirming the people and processes are real whether that happens in person or remotely.
Q: What is the ILPA Due Diligence Questionnaire? A: The Institutional Limited Partners Association (ILPA) publishes a standardized Due Diligence Questionnaire that institutional investors use to evaluate private fund managers. It is free, widely adopted, and covers operations, strategy, controls, and service providers. Most professionally run funds either use it directly or have built their own DDQ that covers the same ground.
Watch the Full Investor Presentation
The full video is available below.
Next Steps
Download the deck and verification questions — working document for your next manager call.
Schedule a call with Chris Carsley to walk through KCG's verification documents.
Request the Kirkland Income Fund DDQ for your verification file.
Watch the prior session in this series: Build Your Own Investment Team with These 6 Networking Tips
