FoHF operational due diligence still falling short, says Laven Partners
Funds of hedge funds (FoHFs) still need to make improvements in their operational due diligence (ODD) checks on hedge funds, according to Max Ferri, manager at consultancy firm Laven Partners.
Ferri told COO Connect that most FoHFs had improved their initial operational due diligence checks since 2008 – however, many still “were markedly weaker at their ongoing operational due diligence.”
“Some have increased their efforts, but more could be done. Through its life, a hedge fund can change the way it operates quite often. This could include changes in service providers, changes to the management company’s team, changes to the hedge fund’s structure or even changes in the instruments that a hedge fund invests in,” added Ferri.
“The industry recommends that ODD staff should carry out a new complete ODD overview every 12 months at least. During this period ODD staff should continue to monitor significant changes to the hedge fund and its management company,” said Ferri. “It is also recommended that a separate ODD person or team performs either the monitoring or at least the annual updates so as to avoid any potential conflicts”.
He also acknowledged some FoHFs have understaffed ODD teams – frequently, only one or two staff members are looking at a large number of funds, which are either part of a FoHF’s portfolio or on an approved list. Given that it can take over 100 man hours to complete a single ODD report, this is something Ferri believes needs to be rectified.
These claims were, however, denied by Aberdeen Asset Management. A spokesperson for the company said its FoHF business had robust ODD checks. He added numerous FoHFs had made significant improvements in their ODD practices following the financial crisis.
Laven Partners is a global consulting firm focused on the alternative investment industry. With offices in London, Luxembourg, Geneva and Barbados, Laven Partners offers fund set up, structuring, regulatory compliance, legal and tax services to asset managers.