While many investors are clearly pleased that some of their hedge fund investments are rebounding, it is still incumbent on affluent investors and their advisors not to let down their guard in ensuring that their funds are in good hands.

“Now more than ever, investors and their financial advisers should perform careful due diligence before investing, especially if the investments involved are complex and opaque, “ observes Jay D. Levy, a CPA, and J.H. Cohn LLP's financial services industry co-practice director. Levy, an auditor of hedge funds, recently recommended important steps to take in evaluating a hedge fund.

Probe your investment manager. Investigate the investment management firm's reputation and financial performance. Among other tips Levy recommends in an Investment News article: find out whether the fund has a history of barriers to withdrawal, such as closures, investments in illiquid securities, lockups, adoption of redemption fees or implementation of gates. Probe the fund's key employees and their roles. Evaluate the fund's research and investment decision-making process.

Review the fund's operations, technology, internal controls and infrastructure. Investigate the way a hedge fund conducts its daily business. Therefore, it is entirely appropriate for an adviser to ask about a fund's operational risks and what internal controls have been instituted to prevent errors and fraud.

Assess the quality of the fund's service providers and vendors. Identify service providers and vendors, including prime brokers, administrators, legal counsel, marketing agents, custodians, auditors and technology providers.

Look into regulatory and legal issues. Make sure the investment manager has registered with the Securities and Exchange Commission or other appropriate regulatory authorities, if required. Has the investment manager been involved in any legal proceedings?

Probe the fund's business continuity/disaster recovery plan. In case of a natural disaster or another catastrophe, can the fund meet its obligations to investors? Find out about the fund’s records and key employees.

Try to obtain your information in personal meetings. Reading through fund papers is fine but not enough to delve into a fund’s strategy, operations and susceptibility to various risks.