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ODD Red Flags for Investors: Transparency, Service Providers, Valuation and More

By Kaleigh Alessandro,
Thursday, October 5th, 2017

During a recent webinar on operational due diligence, we explored the changing ODD environment for emerging managers, and our guest speaker, Frank Napolitani of EisnerAmper, helped shed light on some critical missteps that could cause ODD teams to veto an investment.

At the highest level, investor due diligence experts see the following as the most egregious red flags:

  • Dishonesty: Demonstrated in the form of failing to disclose or withholding information. This shows a lack of integrity.

  • Belligerence: When managers exhibit an ‘I’m never wrong’ attitude and are unwilling to listen to objective advice.

  • Incompetence: When a firm or manager’s skillset doesn’t align with the expertise required for a particular function.

More specifically, there are a number of red flags that can give investors pause and lead to either increased due diligence or an outright rejection. From a recent Deutsche Bank survey, here are a few reasons:

  • Lack of independent oversight (e.g. self-administered funds)

  • Poor segregation around cash controls

  • Unwillingness to provide transparency

  • Insufficient operational and technological infrastructure to support the fund’s strategy

  • Valuation issues

  • Insufficient checks and balances from the non-investment management staff

  • Unsatisfactory service provider engagement by investors (refusal)

  • Unsatisfactory or ineffective remuneration policies (LP alignment)

  • Insufficient personal wealth invested in the fund

  • Lack of integrity

Ultimately, it’s imperative for fund managers – emerging or otherwise – to clearly articulate their capabilities and demonstrate thoughtfulness in their approach to their portfolio as well as the business operations that have come to make or break investment decisions. Specifically, managers should be prepared to address, in detail, their processes and decisions related to:

  • Pre-trade compliance/order routing

  • Post-trade allocations

  • Work flow with prime broker(s)/administrator(s)/auditor(s)/etc.

  • Cash movements: subscriptions, redemptions, incentive fees, etc.

  • Technology (EMS/OMS, PMS, etc.)

  • Regulatory and compliance

  • IT infrastructure (Cloud, network, redundancy, communications, etc.)

  • Disaster recovery & business continuity

  • Cybersecurity preparedness

More articles on Operational Due Diligence:

Categorized under: Operational Due Diligence  Cloud Computing  Security  Outsourcing  Launching A Hedge Fund  Private Equity  Disaster Recovery  Hedge Fund Operations  Infrastructure  Business Continuity Planning  Trends We're Seeing 

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