© 2009 Corgentum Consulting, LLC
Has Rigor Mortis Set In On Your Due Diligence?
- The dangers of inflexible operational risk
methodologies
When comparing operational due diligence methodologies across different hedge fund
allocators consistency of approach is often a key concern. These concerns however, must be
counter-balanced with the notion that all hedge funds are not created equal. In order to
successfully vet the full entirety of operational risks present at a hedge fund, an investor must
sometimes be prepared to add an element of flexibility to their approach. Such flexibility
can often lead to covering areas not traditionally addressed in detail during the course of
standard methodology reviews. Such flexibility often sheds more light on the operational risks
already uncovered during standard methodology reviews. Similarly, flexible approaches tend
to allow investors to uncover a series of operational risk factors which were previously not
reviewed under standard methodologies. Inflexible operational due diligence approaches, can
suffer from a check-the-box mentality which can be detrimental to both hedge funds and
investors. Furthermore, inflexible operational due diligence approaches are more susceptible
to fraud as they are easier to manipulate from the perspective of the fraudster. Investors
should seek to have an element of flexibility in their operational due diligence process to
design the most appropriate review specifically tailored to meet the needs of each unique
hedge fund manager, while at the same time not sacrificing the benefits afforded by having
minimum uniform standards in place.
Investors have
Different hedge fund investors may have different sensitivities and priorities in regards to the
different operational
operational riskiness of a hedge fund. So for example, one investor may only place minimal
sensitivities
importan