New research observes “a fundamental shift” in the due diligence carried out by hedge fund investors, and heightened demand for transparency from fund managers.
Deutsche Bank said Monday that its study, which polled senior professionals at leading fund-of-funds and consultants in Europe representing over US$411 billion in hedge funds assets under management, found that the level of sophistication that institutional investors are applying to operational due diligence has “increased significantly” as they demand greater transparency from managers.
The research finds that operational due diligence teams are now viewed as a partner to the investment team, and that they are actively vetoing investments. It also reveals that “robust infrastructure, established service providers and a culture of compliance and governance are now vital considerations in the investment process.”
Sweeping changes in the way that investors evaluate hedge funds, and the emphasis now placed on rigorous controls, comes in the wake of the financial crisis, and subsequent hedge fund losses, it notes.
Deutsche reports that operational due diligence teams have vetoed investments in the past 18-24 months for a variety of reasons, including: lack of independent oversight, such as self-administered and self-custodied funds, using an unknown audit firm or a board with no independent directors; unwillingness to provide transparency; valuation issues, including weak or unclear valuation policies; and, insufficient investment in the funds by its managers.
Chris Farkas, head of European Hedge Fund Consulting at Deutsche Bank, said, “The research highlights how important the fundamentals are to the operational due diligence process – from having the right people in place to a proven audit trail. The growing importance of operational due diligence comes at a time when investors are better educated than ever in all aspects of a fund’s business.”