The importance of operational due diligence (ODD) has never been more pronounced than in today’s complex regulatory environment. A recent Deutsche Bank survey of global investors revealed that nearly 75% believe fund compliance is the primary concern for 2013 and that 80% have a committed ODD group. This ODD check highlights five essential questions investors must ask in an initial hedge fund ODD review.
1. “Is there true independent administration?”
Reason: A fund should always employ an independent administrator to insure the objective and accurate valuation of assets. Independence can mitigate fraud, insure the reliability of fees, and promote transparency.
2. “What is corporate governance structure?”
Reason: Investors should look to see that managers and directors are sufficiently independent to prevent conflicts of interest. The ability of the COO or CCO to veto a trade, for instance, or the number of official signatories required to transfer cash are essential matters to clarify.
3. “How does the firm deal with compliance matters?”
Reason: Given the regulatory environment after Dodd-Frank, it is imperative that hedge funds maintain a strong compliance culture. Dedicated teams, updated manuals, and a proactive attitude regarding the compliance process should be evident.
4. “Are service providers of prime quality?”
Reason: Small, unknown, or inexperienced service providers should raise red flags. High quality in prime brokerage, audit, accounting, and administration demonstrates the fund takes operational matters—including service expertise and counterparty risk—seriously.
5. “Could five questions ever be enough?”
Reason: Comprehensive ODD requires the help of expert, independence advice. At Laven Partners, we provide investors with full-service, ongoing ODD reports that cover service provider agreements, background checks, legal contracts, cash segregation measures, trade flow and execution, business continuity protection, and overall enterprise risk management.
