(July 3, 2013) — The changing regulatory environment is the main driver of expanding due diligence by hedge fund investors, according to Deutsche Bank’s latest survey.
The bank’s hedge fund consulting group polled 68 institutional investors from around the world, whose assets totaled $2.13 trillion with a hedge fund allocation of $724 billion. Nearly three-quarters of respondents ranked a fund’s compliance and regulatory framework as their top priority for 2013.
The large majority (70%) of external operational due diligence (ODD) teams had explicit veto authority in the investment decision making process, and 63% of investors said they would not consider allocating to a fund previously vetoed by an ODD team. Investors reported conducting an average of 50 manager reviews a year, and 80% said they have a dedicated ODD group.
The survey also found the majority of respondents had little to no tolerance for expenses such as non-research related travel or external employee compensation.
Those surveyed preferred hedge fund boards to be heavy on independent directors. Investment in human capital and proper segregation of duties ranked as investors’ top two operational wishes when assessing start-up managers.
“This survey demonstrates the critical importance of operational due diligence to hedge funds as the industry experiences an ongoing evolution,” Pam Kiernan, Deutsche Bank’s global head of hedge fund consulting said. “Our results show that these teams have advanced in sophistication and provide valuable insights as to how managers can prepare for the road ahead.”