2019 Hedge Fund Outlook
CURRENT STATE OF OPERATIONAL DUE DILIGENCE
Operational due diligence is at a stage 7 of maturity, on a scale of 1-10, 10 being standardized at a level of institutional quality. The marketplace has now largely adopted the philosophy that ODD needs to be done, and outsourcing has become commonplace amongst both small and large institutional investors. Large allocators tend to outsource their overflow, more complex funds warranting a second independent opinion, and their overseas work.
ODD BY PRIVATE FUND TYPE
Hedge funds head the way in the adoption of in depth ODD, while private equity funds follow shortly behind, and real estate and venture capital funds are generally less accustomed to these practices and the standards of operational infrastructure required by institutional investors. PRISM works with RE and VC funds on mock ODD reviews, and works with investors on hedge fund and private equity fund independent operational due diligence assignments.
CURRENT STATE OF HEDGE FUNDS
Alternative investments will continue to play an important role in the asset allocation process. There are industry discussions about the state of the “struggling hedge fund industry”; however, PRISM does not see it this way. Yes, the hedge fund industry has become overcrowded in the last decade, which is creating a higher number of fund closures. Nonetheless, the most talented and highest skilled money managers and investors alike will continue to generate alpha and solid uncorrelated returns.
ODD CONSOLIDATION AND THE FUND PAY MODEL
PRISM has always saw the ODD function to be one that should be independent of the investor, like an auditor or a level 3 valuation agent. Moving to a purely outsource model would bring several benefits to the market, namely comfort and cost savings. Ultimately moving to a fund pay model, where there is one review done annually by a qualified ODD firm, does make great financial sense for both the investors and the investment managers.