Hedge Fund Due Diligence Spikes

Terry Flanagan

Hedge funds are experiencing a spike in due diligence investigations as institutional investors demand greater transparency into fund operations.

According to Deutsche Bank’s Hedge Fund Consulting Group’s second annual operational due diligence survey, which polled investors globally representing over $2.13 trillion of total assets, with a hedge fund allocation in excess of $724 billion,  almost three quarters rank a fund’s compliance and regulatory framework as the top priority for 2013.

“This survey demonstrates the critical importance of operational due diligence to hedge funds as the industry experiences an ongoing evolution,” said Pam Kiernan, global head of hedge fund consulting at Deutsche Bank. “This survey demonstrates the critical importance of operational due diligence to hedge funds as the industry experiences an ongoing evolution. Our results show that these teams have advanced in sophistication and provide valuable insights as to how managers can prepare for the road ahead.”

The survey polled 68 institutional investor entities, including consultants, endowments, public pensions, sovereign wealth funds, fund of funds, private banks and family offices. 63% of respondents manage more than $1 billion in hedge fund assets under management.

One way of meeting investor needs for transparency, as well as creating new distribution channels, is a managed account platform, through which rigorously screens managers to ensure that each manager selected has the capacity to offer risk-adjusted performance, while eliminating operational impediments traditionally associated with alternative investing.

Wilshire Funds Management operates the Wilshire Managed Alternatives Platform (MAP), a turnkey alternative investment management system that employs a master-feeder managed account structure. When an investor signs on to the platform, investable assets are funneled via one or more feeder funds, which can be formed in a variety of vehicles.

The funds are then allocated across multiple cells, which invests its portion of the total into a fund, fund of funds, or managed account.

“The growing importance of liquid alternative investment strategies has raised the stakes on effective due diligence and portfolio construction for advisors,” said Jason Schwarz, head of Wilshire Fund Management’s Advisor Solutions initiative. “By providing a turnkey, managed model portfolio of liquid alternative strategies, we are essentially addressing the three major questions we are often asked by advisors: how much should I allocate to the various asset categories, like long/short versus global macro? How do I identify high quality, institutional caliber managers? And, when and how often should I make changes to the portfolio?”

Experience in the alternative investment space, innovation in developing the alternative management platform and diligence in evaluating and monitoring managers make Wilshire uniquely suited to deliver the transparency, liquidity and customization required to meet the alternative investment needs of sophisticated investors, according to Schwarz.

“Success in the liquid alternatives space requires more than just investment expertise,” he said. “Education, guidance, and implementation advice is critical in helping advisors understand how best to incorporate alternatives into their clients’ portfolios.”

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, according to the Deutsche Bank survey. 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.

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