Hedge fund operational due diligence since 2009.

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Both emerging and larger mature managers are always asking, “What should we be ready for during an institutional ODD review?”. Here is a helpful overview: 


ODD is typically done in the last phase of manager due diligence, so don’t be surprised if after 3 or even 6 months of meetings and questions on the investment strategy and returns, you are now asked to go through some type of independent and specialized operational due diligence (“ODD”) process. The ODD process typically starts with a document request, which as a manager, one should submit within 48 hours, in the format requested by the investor or its consultant. Next is a service provider reference check or DDQ confirmation process with various service providers ranging from fund administrator to offshore directors to technology to regulatory consultants. For color on what level of detail is requested, PRISM has developed its own specialized commercially acceptable DDQs for over 15 different types of service providers. Once the documents and service provider confirmations are reviewed, a site visit is usually conducted with a manager’s back office. The site visit is generally 3-8 hours in length, depending on the firm conducting the review. During this site visit, the ODD consultants will interview the CFO, Controller, CCO, Trader, CTO, IR, and other business related staff to gain a full understanding of the firm’s business risks, and its internal control framework. They will look at systems and conduct onsite “testing” of tangible evidence of operational efficiency such as reconciliations, committee minutes, and/or accounting records. ODD consultants generally provide “assurance reports” with some type of approval or rating, and if the ODD team is in-house, they are said to have “veto power”. Once a manager fails an ODD process, it can be difficult to turn around a decision, unless the manager is open minded about their operational evolution and steps it may need to take to lower its operational risk. Barring finding significant operational risk signaling fraud, it is however possible to discuss the ODD findings with the ODD consultant in order to find a way for the parties to work together in an LP/GP relationship. The average ODD process takes 40 hours and ODD reports range from 12-50 pages in length.

Hedge Fund and Private Equity Fund Operational Due Diligence

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