Family Offices and public pensions stress the need for operational due diligence

The recent sentiments from two investment conferences from two very different and influential groups of investors are clear: due diligence and in particular operational due diligence, will be a key factor in designing and maintaining any hedge fund (or fund of hedge funds) investment program.

At the recent the Public Fund East Summit (which was primarily attended by public pension funds) and the Family Office & Private Wealth Management Forum in Newport, Rhode Island both groups shared similar concerns and opinions about due diligence.

From early on in the conference one message was: a lack of comprehensive due diligence was previously not being performed and that in the post- Madoff environment both family offices and public pension funds are particularly focused on operational risk in alternatives in general and hedge funds in particular.



Some key points being stressed by both groups on the operational due diligence front include:

• Using a hedge fund managers time in a productive way

*Importance of on-site visits (walking the floor and kicking the tires)

*Reference checks & background checks

*Need for independent operational oversight

*One can get to a point of diminishing returns but there are a lot of boxes that need to be checked

*Stress on trade flow, counterparty management

*The importance of document collection and review

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Impact of European hedge fund regulation in the US

In the article entitled, "Europe's Hedge Fund Regulation Efforts Have US Implications", Jason Scharfman, Corgentum Managing Partner, discusses the potential consequences of European hedge fund regulation in the US with the Wall Street Journal. Mr. Scharfman outlines that new regulations are actually "going to hurt a lot of pension funds and other large hedge fund investors because it will be giving them a false sense of security."


He further goes on to clarify that "hedge funds aren't trying to avoid tough regulation so they can commit fraud. Rather, they are trying to avoid the bureaucratic red tape that can cost managers lots of time and money, and ultimately dent investors' returns." The full article can be read on the Wall Street Journal website (subscription required).

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