Fund Operating Environment, Documentation, Financials, and Service Providers
This section provides a high-level summary of some of the common themes and questions investors use to perform due diligence on a fund's operational environment. This includes validation of a fund's internal procedures and its relationships or exposure to important service providers. Once again, it is by no means comprehensive and is intended to provide a sample of the types of issues that investors are facing when trying to independently assess the quality of a fund's operating environment.
An operational due diligence program includes review of several important aspects of how a hedge fund is managed and how its interaction with the fund itself is controlled. The primary purpose of operational due diligence is to ensure that no significant additional risk of loss is being created for investors related to the settlement of securities, process of corporate actions, misappropriation or theft by employees or agents, or any other breakdown in the manager's confirmation, verification, valuation, and reconciliation process.
An investor performing operational due diligence generally focuses on assessing the adequacy of a manager's internal controls, consistency of fund documents and legal representations, and the risks of loss due to counterparty or service provider failure.
Internal Control Assessment
A review of a manager's control environment includes many items. Some of the more important items that investors ...