Analyzing Operational Due Diligence Frameworks
In Fund of Hedge Funds
Jason Scharfman1, Managing Partner, Corgentum Consulting LLC
Abstract
An analysis was conducted using a sample of over 275 global hedge fund allocators of the
operational due diligence frameworks in place at these organizations. By developing an
understanding of the operational due diligence structures in place, this paper establishes a
transparent benchmark against which operational due diligence frameworks may be compared.
The findings indicate there is a substantial variety present in the operational due diligence
frameworks utilized by hedge fund allocators, such as fund of hedge funds. On a global basis, a
myriad of hybrid approaches are in place at smaller allocators. Regionally, while a dedicated
approach to operational due diligence is generally favored, no one framework emerged as a clear
global leader. As compared to smaller allocators, larger organizations seemed to have more
resources dedicated specifically to operational due diligence. These findings are consistent with
predictions that hedge fund allocators such as fund of hedge funds, in part driven by investor
demand, will continue to allocate more resources to underlying hedge fund manager operational
due diligence.
May, 2009
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1 Jason Scharfman (scharfman@corgentum.com) is the author of Hedge Fund Operational Due Diligence:
Understanding the Risks (John Wiley & Sons 2008) and a Managing Partner at Corgentum Consulting LLC
(www.corgentum.com).
1
Due diligence is a critical component in the hedge fund selection and allocation process.
In light of a series of recent losses due to fraudulent activities and Ponzi schemes by individuals
such as Bernard Madoff, both hedge fund allocation organizations such as fund of hedge funds as
well as investment consultants who recommend hedge funds to investors will likely need to re-
think their approaches towards due diligence. In its current state, the modern hedge fund