The Developing Story of AIJ Proves the Importance of Operational Due Diligence Posted on March 5, 2012 by admin As recent developments of Japan’s AIJ scandal unfold, it becomes more and more apparent that much of the problems AIJ’s investors may face could have most likely been prevented through some basic operational due diligence. According to Bloomberg, as of February 24, AIJ is under investigation by the FSA because they were not able to account for 185.3 billion yen or 2.3 billion US dollars in assets. If AIJ is found guilty, it could be one of the largest frauds in Japan’s history. Bloomberg also reported that some investors who had been interested in allocating their assets with AIJ have come forth to say that AIJ would not allow operational due diligence to be performed on their firm or funds. When a fund manager rebukes an investor’s attempts to even perform due diligence this is perhaps the reddest of the red flags and should have halted all thoughts of further investor due diligence. For the many that did not attempt to perform due diligence, they will now have larger issues than simply finding the right due diligence provider. This is a perfect example of why transparency between an investor and a fund is a key. If a fund refuses to allow due diligence, operational or otherwise, to commence, investors should be leery of investing capital with them. In addition to apparently refusing investor due diligence requests, AIJ was reportedly producing unusually high returns while providing very little information about their purportedly blackbox strategy. Often relegated to the past are notions are such purely blackbox strategies. Investors are increasingly, perhaps willing to sacrifice such unusually high returns for more transparent investment strategies. Such total blackbox strategies are perhaps another red flag for investors and something that operational due diligence could have picked up on right away during sanity checks of fund performance as well as having an understanding of risk management processes and procedures. Operational checks and balances also would have likely yielded more questions than answers and raised yellow flag alarms which would have required further due diligence. This developing AIJ story also perhaps highlights the faults in Japan’s continuing focus on regulatory isolationism. Japan’s insular focus on pension system asset management has not apparently expanded beyond its traditional isolationist roots. The Japanese investment community apparently is still struggling to unravel itself from the belief that supposed better performance trumps a lack of transparency. The Japanese investment industry will not improve until Japanese investors realize that applying neutral operational risk reviews of fund managers is not only appropriate but certainly essential for the Japanese financial systems to evolve beyond the old world Keiretsu trust and do not verify paradigm, once shattered by Commodore Perry.
© 2011 Corgentum Consulting, LLC
The emerging AIJ story is a vital example of how important operational due diligence is, and a story which likely contains many more plot twists to come, including recent revelations that Japanese government officials assisted in marketing the AIJ funds. For more information: info@corgentum.com Tel: 201.360.2430 www.Corgentum.com
Š 2011 Corgentum Consulting, LLC