Hedge Fund Operational Due Diligence: Corgentum Study Finds Madoff Ponzi Effect Influences Investor Due Diligence
Corgentum Consulting, the preeminent provider of the industry’s most comprehensive hedge fund operational due diligence reviews for investors, today announced the results of a new study focused on investor due diligence trends. This research shows that as a result of recent frauds and Ponzi schemes, a Madoff Effect has developed, altering the nature and scope of investor due diligence. The data also shows that in anticipation of stricter hedge fund regulation fund of hedge funds are focusing the bulk of their due diligence efforts on legal, compliance and regulatory risks.
The study, ‘The Madoff Effect – An Analysis of Operational Due Diligence Trends’, is available for download at www.Corgentum.com or directly here.
For this study Corgentum collected data from over 200 global hedge fund allocation organizations including fund of hedge funds, endowments, foundations, corporate pensions, family offices, large independent financial advisory practices, ultra high net worth investors and private banking organizations. “The data shows that frauds such as Madoff are an important, but potentially misleading guiding light around which investors tend to focus their due diligence on hedge funds” said Jason Scharfman, Managing Partner.
Investors, influenced by recent hedge fund failures, have refocused their due diligence efforts on operational risk areas where leading operational red flags were present. In particular, since the Madoff scandal broke, this study shows that the number of fund of hedge funds reviewing hedge funds cash management policies and controls increased by almost 60%. Other operational risk areas covered in the Corgentum study that have realized double-digit increases in attention from investors include transparency in reporting and the role of service providers such as auditors and administrators.
Corgentum’s analysis also demonstrates that certain operational risk areas continue to be dangerously neglected during the investor due diligence process. Less than 2% of the fund of hedge funds included in this study considered the independence of a hedge fund’s board of directors during the due diligence process. Other frequently overlooked operational risk areas included information technology infrastructure, personnel turnover and the quality of overall operations management.
“Investor’s must not only understand historical red flags, but be prepared to anticipate new ones. By incorporating proprietary benchmark studies of hedge fund fraud and models of operational inefficiency into our evolving operational due diligence process, Corgentum’s approach ensures investors keep up with the changing nature of hedge fund operational risk” said Scharfman. “Corgentum will continue to partner with fund of hedge funds, pensions, family offices and other investors to create tailored comprehensive hedge fund operational due diligence and ensure that their operational due diligence reviews are not misguided by fraud.”
Opalesque, published an article regarding the study . The article is entitled, “Madoff Effect continues to see investors focus more on fraud risk than operational risk” and is available at www.Opalesque.com or via direct link here (subscription required). Additionally, the press release regarding this study is available here. HedgeCo.Net and HedgeWeek also covered the study in this post.
