Global family office adoption of operational hedge fund due diligence has increased considerably in recent years after lagging behind entities such as endowments, foundations and pensions, according to a new study conducted by US-headquartered Corgentum Consulting.
Reducing from 82% two years ago, the most recent Corgentum survey found that only one fourth (24%) of family offices, or their consultants, now do not perform any operational due diligence for hedge funds.
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Corgentum surveyed over 120 family office professionals in the US, Europe and Asia. The survey findings, however, also revealed that though operational due diligence is being made priority, 73% family offices do not feel confident that they, or their consultants, have the ability to perform effective operational due diligence.
Only 32% family offices surveyed believe their operational due diligence processes adhere to a minimum consistent level of review, and only 21% follow a documented process.
Operational due diligence is the process of analysing operational risks, which are a fund’s non-investment-related risks, which can include inadequate accounting controls, fraud, human error and business interruptions due to fires, floods or other disasters.
The findings revealed that 57% of those surveyed cited fraud risk as the most significant operational risk. Other perceived risks included regulatory risk, cited by 21% of survey respondents, and counterparty risk, cited by 9%.
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By GlobalDataOne major concern among family offices that emerged from the survey findings is the number of recent cases involving employees or ex-employees who steal data from hedge funds.
"Family offices will ask us to look at information security at technical-trading-strategy hedge funds. If a fund uses a proprietary strategy and there’s a data leak, it can ultimately hurt current investors in the fund, because the competitive edge is going to be destroyed," said Corgentum managing partner, Jason Scharfman.
