Jason Scharfman, Managing Partner at Corgentum Consulting, LLC, sent me a recently completed a study focused on operational risk frameworks in fund of hedge funds, ‘Analyzing Operational Due Diligence Frameworks In Fund of Hedge Funds.’

In short, they analyzed and surveyed over 275 hedge fund allocation organizations (primarily fund of funds) around the world with a variety of AUM (39% managed less than 1 billion and 61% managed more than 1 billion) to study their operational due diligence frameworks:

Some of the key findings include:
Only 27% of Fund of Funds have a full time person on staff or team dedicated to fraud detection

Less resources are dedicated to operational due diligence in the US as compared to the rest of the world (Asia and Europe):

In Asia and Europe there is a trend towards dedicated operational due diligence functions

In North America shared operational due diligence frameworks (where the same people who perform investment due diligence look at operational risk) are the most common

There is lack of consistency in fund of hedge funds operational due diligence approaches

Smaller fund of hedge funds (under USD $1 billion) use a wide variety of operational due diligence frameworks with less dedicated resources

Full report available here.

Jason Scharfman is also the author of the book: “Hedge Fund Operational Due Diligence: Understanding the Risks.”

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