Hedge Fund Operational Due Diligence Consultants – Trust But Verify Investors who first begin to consider alternatives (i.e. – hedge funds, private equity, fund of hedge funds etc.) often take a number of different approaches towards the due diligence. Depending on a number of factors including their own internal resources, institutional capacity, amount of capital to allocate, nature of alternatives strategies they are considering and investment horizon investor generally may take one of several paths. Some typical options include: • • •
Directly investing into alternatives themselves Utilizing a traditional investment consultant for guidance Investing with a pooled allocators such as a fund of hedge funds or managed account platform
Each of these options presents its own unique benefits and challenges however, they do share one common theme – the question of how each of these options approaches due diligence. Hedge Fund Operational Due Diligence – A Specialized Skill Set For purposes of simplicity let us classify due diligence into two broad categories: investment and operational. In much the same way that investment due diligence has become a specialized field, so too has operational due diligence. Over the last several years, operational due diligence has developed into a similarly specialized practice area – and it is an area in which Corgentum exclusively focuses. Regardless of whether investing directly into a hedge fund, utilizing a traditional investment consultant or investing with a fund of funds or platform investors still should consider utilizing the industry’s leading hedge fund operational due diligence consultant, Corgentum, to assist in the operational due diligence process. Operational Due Diligence On Fund of Hedge Funds In addition to performing operational due diligence reviews of direct hedge fund investments Corgentum also works with investors as a hedge fund operational due diligence consultant to perform operational due diligence reviews on fund of hedge funds. This is a different exercise then performing operational due diligence work on a direct hedge fund, and one which requires a detailed understanding of the ways in which fund of hedge funds operate. Complimenting the Due Diligence of Traditional Investment Consultants Similarly, Corgentum works as a hedge fund operational due diligence consultant to compliment the investment due diligence work of their traditional investment consultants. It is inherently a conflict of interest for the same party offering investment recommendations to similarly offer advice on the operational merits of a hedge fund or private equity manager. Biases are inherently present based on the investment consultants opinion as to the investment merits of a manager, and the potential is too great for an investment consultants operational convictions to be swayed one way or the other. As such, many investors who utilize traditional investment consultants, also work with Corgentum as a hedge fund operational due diligence consultant. Investors ranging from large institutions and
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professional allocators such as fund of hedge funds to high net-worth individuals rely on Corgentum to continue to conduct the industry’s most comprehensive operational due diligence reviews. Is Your Hedge Fund Operational Due Diligence Consultant Qualified and Experienced? Investors must take steps to ensure that their hedge fund operational due diligence consultant, possesses the qualifications and experience to conduct thorough operational due diligence reviews. Some questions to ask include: • • • •
Is a multi-disciplinary team of professionals utilized or is one area (i.e. – accounting or compliance) focused on? Does experience exist covering different types of hedge fund strategies in different regions throughout the world? Is the hedge fund operational due diligence process institutional in nature? Does the hedge fund operational due diligence process evolve over time to adapt to changing industry practices?
Trust But Verify – Due Diligence on the Due Diligence Providers Investors should perform due diligence on their hedge fund operational due diligence consultants to ensure that they are not simply checking the box and telling investors to “Trust them” that a manager is operational sound. This includes not just outsourcing the operational due diligence process but becoming an active participant in the process. Corgentum’s clients not only benefit from our analysis and opinions regarding the operational risk of a particular manager, but Corgentum’s comprehensive process explains in detail why such conclusions were reached. The old auditors adage, “Trust but verify” is applicable not only when performing operational due diligence on hedge funds and private equity funds themselves, but also on those performing the due diligence.
Originally posted on the Corgentum Consulting blog at www.Corgentum.com/blog For More Information
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