The Derivative of Due Diligence: Performing due diligence on the quality of a fund of hedge fund’s operational due diligence With an ever increasing understanding of the benefits of reducing their exposures to operational risk, investors have more or less accepted as common sense, the benefits of performing operational due diligence on hedge funds. Historically those newer to hedge fund investing may have occasion relied in part upon fund of hedge funds to perform some of the heavy lifting for operational due diligence on underlying managers. Indeed, Corgentum assists many fund of hedge funds in building, maintaining and executing their operational due diligence functions. For those new to the alternative investment arena, investors wetting their feet with fund of hedge funds to introduce them to many different aspects of hedge fund investing, including operational due diligence, is often a logical and useful first step. Of course, there are other investors who choose to learn on their own, and they too can often be more successful than fund of funds. That understood, those investors who rely on fund of funds often may not take appropriate measure (or have the requisite skills, understanding or experience) to objectively perform evaluations of the operational due diligence function and processes employed at the fund of hedge funds. Said another way: performing due diligence on the due diligence. This may, in part, due to some of the characteristics of some those who utilize fund of hedge funds (i.e. – those new to alternatives). Other reasons for this lack of focus on the due diligence function is the difficulties in place in objectively evaluating and comparing operational due diligence functions across multiple fund of hedge funds. When performing due diligence on a fund of hedge funds an additional layer to the due diligence process should incorporate a review of the quality, nature and framework of the due diligence function in place at the fund of hedge funds. Research by Corgentum has found that four commonly utilized operational due diligence frameworks in place include a dedicated framework, a shared framework, a modular framework, and hybrid frameworks. The review of a fund of hedge funds operational due diligence function should encompass a review of the resources allocated by the fund of hedge funds to the due diligence function. Additionally, this review should include an analysis of the process utilized to perform an initial due diligence review as well as the process and frequency for on-going monitoring. Corgentum works with investors in fund of hedge funds to perform operational due diligence reviews of hedge funds. These operational due diligence reviews of fund of hedge funds encompass a review of a wide variety of fund of hedge fund specific risks including an evaluation of the operational due diligence function in place. Performing an evaluation of the operational due diligence function can further help investors risk assessment of a fund of hedge fund and increase their chances of selecting a fund of hedge funds that performs more detailed operational reviews of their underlying hedge fund exposures. Originally posted on the Corgentum Consulting blog at www.Corgentum.com/blog For More Information
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