Before a fund allocator can allocate an investment to a fund manager, they need to understand the fund manager’s operational infrastructure and whether it poses any risks to the allocator’s investment. To identify any possible operational risks or failures, the fund allocator needs to conduct thorough operational due diligence - a process that can be resource-intensive and prone to error without the proper systems and support in place.
In this blog, we explore operational due diligence in investment management and the main operational risks fund allocators assess during the process. We then unpack how, with the right investment management platform, operational due diligence activities can be consolidated to help allocators and managers achieve optimal alignment throughout the process.
Fund allocators and investors conduct operational due diligence on existing or potential fund managers to identify any operational risks that could negatively impact their investment, and to assess the fund manager’s overall ability to effectively manage the allocator’s investment. The process typically involves evaluating the fund manager’s operational infrastructure, processes, and systems, and is a key part of the overall fund allocation process.
When evaluating the organisational structure of a fund manager, allocators assess the manager’s governance, compliance and risk management processes to ensure they are optimally designed and effectively executed; this extends to the manager’s investment process, including how they select investments, monitor performance, and ensure compliance with key regulations. Allocators also look at fund managers’ infrastructures and systems, including their trading platforms, portfolio management systems, and reporting systems, to assess whether these are adequate for meeting investment strategy goals and are in line with industry standards.
The operational due diligence process also includes reviewing a fund manager’s third-party service providers, such as fund administrators, custodians, and auditors, and whether these are reputable and appropriate, and can also include on-site visits to the fund manager’s premises.
There are several key operational risks specific to the investment management industry that fund managers actively try to mitigate and which allocators aim to identify and assess through the operational due diligence process. Below we discuss some of these key risks and their impact.
Risk management - Effective risk management processes that are regularly reviewed and tested are vital for ensuring that any risks an investment is exposed to that could affect its profitability are properly identified and effectively managed. These include market, interest rate and liquidity risk.
Compliance - Fund managers, like other players in the investment industry, are subject to a wide range of (often complex and changing) regulatory requirements, which also vary between geographies. Non-compliance with these regulations can lead to significant financial and reputational damage for a fund manager, and poses great risk to fund allocators and investors. As such, effective compliance processes and reviews are an integral part of operational risk management.
Cybersecurity - Without the proper security protocols and processes in place, fund managers are vulnerable to potentially disastrous cyber attacks that can compromise sensitive data and disrupt operations. Ensuring robust data and system security that is properly maintained is critical in this highly digitised world, and ensures private investment information is protected and funds remain secure.
Business continuity - In a similar vein to the cybersecurity risk above, fund managers need to have comprehensive business continuity plans in place to ensure operational continuity in the event of a disaster or disruption, so that the ongoing management of investments is assured regardless of external factors. Again, these plans should be regularly reviewed and tested for robustness and efficacy.
These are just a few of the operational risks fund managers face that fund allocators will scrutinise as part of their operational due diligence processes. These risks can change over time and depending on external factors like geopolitical conflicts or third-party supplier problems, so fund managers need to keep on top of these risks and adapt their operational risk management plans accordingly if necessary.
Investment management platforms offer fund managers and allocators alike a number of capabilities that help streamline the operational due diligence process overall. Some of these include:
With investment management platforms, fund allocators and fund managers can create a more efficient and transparent operational due diligence process, with standardised work flows that ensure process continuity while enabling better collaboration and communication between all involved parties.
As part of our investment management platform, AlternativeSoft offers an advanced operational due diligence solution that aligns workflows between fund allocators and fund managers. The all-in-one, cloud-enabled due diligence analytics tool is centralised and fully auditable, and can be combined with industry-recognised investment analytics to help allocators create their ideal ecosystem for selecting and monitoring the best fund managers.
With our due diligence software:
For more detail about how our due diligence solution works and how it enables fund allocators and managers, download our Due Diligence Analytics brochure now.
With a combined AUM of over $1.5 trillion, AlternativeSoft’s clients include some of the world’s largest pension funds, sovereign funds, endowments, fund of funds, and wealth managers. Our solutions enable these clients to create bespoke investment universes that enhance their portfolio performance and their risk management.
Operational due diligence is a key priority for every fund allocator as it’s vital for ensuring that their fund manager of choice can help their investments thrive despite both internal and external risk factors. But for many allocators and managers, operational due diligence remains an onerous and time-consuming process. To make it as streamlined and efficient as possible, it’s worth leveraging an investment management platform with the capabilities to consolidate every step of the operational due diligence process.
With the help of an expert, award-winning provider like AlternativeSoft, getting started with an operational due diligence solution is easy, and you can look forward to greater alignment with your fund managers and better investment portfolio performance overall.
For expert insights and tips into how to conduct your due diligence correctly, download our handy ebook, or get in contact with our team for more information on how AlternativeSoft’s solutions can help your business.