Evaluating Hedge Fund Due Diligence

In the realm of alternative investments, conducting due diligence is crucial for assessing the viability and risks associated with an investment opportunity. One common method used to evaluate the worthiness of a hedge fund is to analyze its historical performance metrics. Consider a particular hedge fund that claims to have consistently outperformed the market averages over the past five years, claiming an annualized return of 15% compared to the market's 10%. However, further investigation reveals that the fund had concentrated investments in a specific sector that was performing exceptionally well during that period.

As an analyst, you are tasked with evaluating whether the claims of the hedge fund are legitimate and whether the promised returns can be relied upon for future investments. Which of the following approaches is most effective during your due diligence process?