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29 October 2012

Hedgeweek: Research reveals transformation in investor evaluation of hedge funds


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A study by Deutsche Bank has revealed a fundamental shift in the depth and nature of due diligence carried out by hedge fund investors.


The level of sophistication institutional investors apply to operational due diligence has increased significantly as they demand greater transparency from managers. The research reveals a robust infrastructure, established service providers and a culture of compliance and governance are now vital considerations in the investment process.

Reasons operational due diligence teams have vetoed investments in the past 18 to 24 months include:

  • 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 – investors will assess strategy, disclosures made to other investors and track record, and expect access to sample portfolios to perform detailed risk analysis and identify style drift;
  • valuation issues – including weak or unclear valuation policies, lack of administrator pricing expertise, or absence of CFO sign-off on a portfolio manager’s pricing of illiquid instruments;
  • insufficient investment of personal wealth – investors understand compensation structures and expect a significant proportion of a founder’s liquid capital to be invested in the fund to align interests to their own.

Daniel Caplan, European head of global prime finance at Deutsche Bank, says: “Institutions have embraced hedge funds as a source of positive risk adjusted returns, and this runs hand-in-hand with a greater focus on control and compliance. Investors have a rigorous toolkit of evaluation techniques and hedge funds have responded by vastly increasing transparency and access.”

Full article



© Hedgeweek


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