Almost three quarters of hedge fund investors rank a fund’s compliance and regulatory framework as the top priority for 2013, according to Deutsche Bank’s Hedge Fund Consulting Group’s second annual operational due diligence survey.
Deutsche Bank has identified the changing regulatory environment as the most significant factor driving the growing importance of operational due diligence (ODD) amongst hedge fund investors.
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The survey polled investors globally representing over USD2.13 trillion of total assets, with a hedge fund allocation in excess of USD724 billion.
Operational due diligence has continued to grow in importance and an overwhelming 70% of ODD teams now have explicit veto authority in the investment decision making process, which was exercised in almost 10% of manager reviews.
In a further sign of the influence ODD teams now hold, 63% of investors won’t reconsider investing in a fund previously vetoed by the ODD team.
According to the survey, 80% of respondents have a dedicated ODD team and investors conduct an average of 50 manager reviews a year while majority of respondents have little or no tolerance for expenses such as non research related travel or employee compensation being charged to the fund and 40% accept charges such as regulatory reporting.
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By GlobalDataThe survey reported that majority of respondents prefer at least three directors on the board including two independent directors. Nearly a quarter vetoed an investment due to lack of independent governance.
The survey found that investment in human capital and proper segregation of duties were ranked as the top two operational recommendations for start-up and emerging managers.
Almost 60% of investors observe daily operations during a typical ODD review, using a ‘trust but verify’ approach to validate what managers represent in their documentation.
Daniel Caplan, European head of global prime finance at Deutsche Bank, said: "Hedge Funds have seen impressive net inflows from institutional investors this year and operational due diligence teams are now a critical part of the investment decision process."
Pam Kiernan, global head of hedge fund consulting at Deutsche Bank, said: "Our results show that these teams have advanced in sophistication and provide valuable insights as to how managers can prepare for the road ahead."
