Analyzing Operational Due Diligence Frameworks in Fund of Hedge Funds

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.