The level of sophistication institutional investors apply to operational due diligence has increased significantly as they demand greater transparency from managers. The research reveals a robust infrastructure, established service providers and a culture of compliance and governance are now vital considerations in the investment process.
Reasons operational due diligence teams have vetoed investments in the past 18 to 24 months include:
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lack of independent oversight – such as self-administered and self-custodied funds, using an unknown audit firm or a board with no independent directors;
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unwillingness to provide transparency – investors will assess strategy, disclosures made to other investors and track record, and expect access to sample portfolios to perform detailed risk analysis and identify style drift;
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valuation issues – including weak or unclear valuation policies, lack of administrator pricing expertise, or absence of CFO sign-off on a portfolio manager’s pricing of illiquid instruments;
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insufficient investment of personal wealth – investors understand compensation structures and expect a significant proportion of a founder’s liquid capital to be invested in the fund to align interests to their own.
Daniel Caplan, European head of global prime finance at Deutsche Bank, says: “Institutions have embraced hedge funds as a source of positive risk adjusted returns, and this runs hand-in-hand with a greater focus on control and compliance. Investors have a rigorous toolkit of evaluation techniques and hedge funds have responded by vastly increasing transparency and access.”
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