Necessary operational due diligence

This second article of three on hedge funds' operational risks proposes a pragmatic approach to conduct operational due diligence to understand why some hedge funds are potentially more exposed to support a well-informed investment process.Based on top-down assessment of the likelihood of operational events occurring within hedge funds, we also investigate the important costs associated with such a systematic and repeatable process.

Objectives and Limitations

By their very nature, hedge funds remain open to sources of operational risks. Full transparency and tighter regulatory control do not resolve these issues. To continue providing exposure to new risk factors, hedge funds remain exposed to illiquid securities, highly complex financial instruments and, very often, remain rather small operating structures.

Seeking an absolute level of confidence within such an organisation would prove not only utopian but would also be