Fund managers and allocators have become increasingly aware of operational risk and the need to transform their operational due diligence process to account for changing compliance expectations. The alternative funds industry has suffered major losses in recent years due to various operational failures that could have been prevented with effective due diligence processes, and investors and regulators alike are putting increased pressure on allocators to ensure operations are in lockstep with compliance.
Technology has caught up. More due diligence software solutions are available than before, making optimizing operational due diligence processes easier and more efficient than what allocators may expect.
Operational due diligence (ODD) is necessary for ensuring investment managers are taking their fiduciary and regulatory responsibilities seriously across their business, allowing their businesses to benefit from the same best practices and resources as their investing and research functions do. However, as regulatory requirements intensify and new regulations come into effect, allocators need to be confident that the way information is handled is robust, thorough and compliant, and that their operational due diligence process enables this.
Fund allocators are facing an increased requirement to collect and monitor more information about funds’ operational risks than ever before, creating pressure for additional operational due diligence resources, and an increase in the scope, depth and ubiquity of due diligence solutions. Additionally, investors expect fund managers to provide access to operational information promptly and effectively, which can be a challenging requirement to meet given the current state of most operational due diligence processes.
There are several obstacles to an effective operational due diligence process that allocators need to navigate efficiently to ensure comprehensive compliance and risk mitigation. Three of these challenges are explored below.
Growing compliance requirements, the diversity of the fund industry and increasing investor demands have all contributed to the need for more detailed and in depth data for more comprehensive due diligence insights. As such, using standardized checklists and scorecards, or other one-size-fits-all quantitative measures are not effective for assessing operational risks. These rigid approaches with finite criteria don’t account for unique fund features which contribute to, or mitigate against, possible risks.
However, as the scope and frequency of operational due diligence insight requests have increased, and as fund allocators rely less on generic operational due diligence process workflows, the time and resource requirements allocators and managers need to dedicate to ODD reviews has risen. This increase has impacted profit margins and time availability as allocators stretch to meet demands without incurring further expenses or losing more time.
The range of non-investment, operational activities that require assessment is vast and includes, amongst many other things:
The manager’s staff, their experience, qualifications, conflicts of interest and incentives
The role and function of management, committees and directors, as well as authorisation and oversight processes
IT infrastructure and security, and business continuity and disaster recovery capabilities
Legal issues, compliance policies and procedures, and regulatory oversight requirements
The sheer volume of operational-related activities to be assessed and their implications requires judgments from industry experts with considerable experience, but again, experts need to be able to devote sufficient time to research and analysis, and confer with similarly qualified colleagues in order to reach a calibrated conclusion. As a result, a balance between a consistent and objective process to gather relevant information, and professional judgment to qualitatively assess the unique strengths and weaknesses of each fund’s operations is needed. This can only be achieved with full coverage of operational activities and an availability of resources to make meaning of the intel.
It is not uncommon, however, for allocators and managers to find that they don’t have these resources available in house to prepare the documents, complete the questionnaires and attend the meetings needed to streamline the operational due diligence process. At least two experts are required to facilitate an effective ODD process and calibrate issues appropriately, but the more complex the strategy or process, the more resources would need to be involved.
Increased staff resources means higher overheads and requires more management and coordination, and as a result, fund allocators are looking for ways to deal with ongoing operational due diligence process requirements in an efficient and cost-effective way. For many allocators, this has meant looking to external operational due diligence service providers to act on their behalf so as to better navigate their limited internal resources.
Given the existing and increasing complexities funds face when it comes to their due diligence processes, a flexible, sophisticated and effective operational due diligence methodology that considers global best practice standards is necessary for efficient due diligence process transformation. Beyond this, allocators have also sought alternative ways to improve their processes, leveraging the capabilities of technology.
Allocators that implement a robust business infrastructure suffer fewer errors and less disruption, and as such, investing in robust systems and service providers help strengthen operations, processes, procedures, and controls, generating positive returns over the long term. This type of infrastructure is achievable through due diligence software specifically designed to transform operational due diligence processes overall by:
Minimizing room for human error
Gathering data and information in greater detail, more efficiently
Automating time-consuming manual processes
Ensuring consistency and soundness across insights and results
Because software can save allocators considerable time and money, a transformed and ongoing operational due diligence process not only prevents financial losses, but provides the level of insight needed for allocators to make more informed and timely decisions.
AlternativeSoft is a best-in-breed solution for fund selection used across a wide range of investors. Our solution caters for all fund types including hedge funds, mutual funds, ETFs and private equity funds, and allocators leverage our audited digital due diligence capabilities to meet their operational due diligence process needs.
AlternativeSoft provides allocators with a seamless ecosystem that combines asset selection, portfolio construction and operational due diligence solutions, empowering both operational and investment due diligence solutions.
Our solution transforms operational due diligence processes through our centralized, cloud-based and fully auditable platform, over which allocators and managers seamlessly exchange qualitative and quantitative information. With AlternativeSoft, allocators can:
Define due diligence workflows and evaluate manager performance at every stage
Integrate manager data collection and due diligence documentation
Enter information directly into the platform on a standardized basis, rather than re-keying information across multiple disparate channels
Import funds' information fields and historical returns from existing software, Excel or in-house databases
Track all manager engagement with AlternativeSoft’s CRM functionality
Store all data and reports in one central platform
Allocators have become increasingly aware of operational risk and the need for thorough due diligence. This increased focus has highlighted their resource constraints and left allocators feeling additional pressure to dedicate more resources to operational due diligence, in attempts to transform their operational due diligence processes for optimized performance.
This pressure has led to allocators looking to external service providers for additional support, and for opportunities to leverage technology for process improvements. By adopting software solutions that empower the entire fund ecosystem, not just operational due diligence processes, allocators can anticipate attractive returns and more sound compliance, meeting investor needs more quickly, and unstrained profit margins and resources.
If you are exploring digital solutions for managing your portfolio risk, our handy guide on what to consider when choosing the right portfolio risk management tool can help. If you’d like to learn more about how AlternativeSoft can optimize your operational due diligence process, talk to our team of experts now.