Here are some pointers from the 2007 State Street Hedge Fund Research Study. I can't supply a link as the report had to be requested and is not available online yet. There is a story here; "State Street Study Shows Institutional Investment In Hedge Funds Is On The Rise" which is also included in the report.

Among the greatest perceived risks to hedge funds cited by institutions in the study are headline risk (20%) and investment loss (20%). Here are some things to look for before investing in a hedge fund;

1, Ownership structure. Review the ownership structure to ensure that the terms, including redemption policies and lockups abide by expectations and that compensation of employees motivates performance.

2, Adherence to strategy. Analyze current and historical statement to confirm that they adhere to the specific hedge fund strategy for which the manager is being hired. Doing so could reveal managers who have become opportunistic investors once there style comes under performance pressure.

3, Background check. Conduct a complete background check on the hedge fund and its principals, including history, NASD and NFA filings, both civil and criminal records. Complete confidence in your manager is essential to a successful strategy.

4, Trading. Thoroughly analyze the hedge fund's securities dealing and clearing procedures. Whether these procedures are conducted internally or via the service of a third party provider, details can provide insight into a funds risk management philosophy and fee structure.

5, Documentation. Review the hedge fund or separate account documentation, including ADV, offering memorandum and disclosure documents. For US plan sponsors, Employee retirement income Security Act qualifications, SEC and CFTC registrations and filings, and SAS 99 fraud checks also if necessary.

6, Internal procedure. Review the hedge fund manager's internal procedures. It is important to know what tasks the manager performs itself and what duties are undertaken by third party service providers. It is important to ensure the proper risk controls and procedures are in place.

Hedge funds are not equal in the level of information they provide to investors, yet its important to find out all you can.