Manager Due Diligence · Hedge Funds

Operational due diligence examines how assets, records, people and systems are controlled. A compelling investment strategy does not compensate for an unreliable operating process.

Trace cash and authority

Identify the legal owner of each account and the people permitted to initiate, approve and reconcile transactions. A control is stronger when authorization and independent checking are separated. Changes to payment instructions deserve particular attention because an apparently routine transfer can be misdirected.

Review how subscriptions and redemptions are authenticated, how exceptions are escalated and how access is removed when staff leave. Ask for evidence that the process operates in practice, not only a policy document describing what should happen.

Test records and resilience

Reconciliations compare trades, positions, cash and valuations across relevant records. Determine the frequency, the owner of unresolved breaks and the time allowed for resolution. A persistent unexplained difference can matter more than the sophistication of the reporting system.

Consider a hypothetical administrator outage during a redemption cycle. Who can access reliable investor records, who communicates with investors and which activities can continue safely? Business continuity planning should address data recovery, provider failure and key person absence without assuming every system is available.

Verify rather than infer

Check material service relationships and registration information through independent channels where available. Understand the scope of external reviews and any exceptions. A service provider’s involvement does not mean it guarantees the fund or checks every operational process.

Document findings by severity and owner. Missing evidence about cash control should not be offset by a strong return history in a blended score. Set conditions that must be resolved before investment and matters that require ongoing monitoring. Operational diligence continues when providers, systems or personnel change.

Try it yourself

The same employee can alter bank instructions, approve a payment and reconcile the account. What is the central concern?

Show the worked answer

The process concentrates initiation, authorization and checking in one person. Ask for independent approval, verification of changes and review of reconciliations, with evidence that those controls are actually applied.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. Fund terms, investor eligibility and tax treatment vary by product, account and jurisdiction.

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