Operational due diligence (ODD) is a vital element of fund management. Unlike investment due diligence – which focuses on evaluating the financial aspects of a fund – ODD assesses the non-investment elements, such as governance, compliance, cybersecurity and operational processes.
With increasing regulatory pressures and heightened investor risk awareness, ODD not only safeguards against potential operational risks but also bolsters investor confidence and ensures a fund’s long-term stability. Fund HQ – led by experienced consultant Olga Romanova – provides specialised services to deal with the complexities of ODD.
Why operational due diligence is important for fund managers
The value of ODD in fund management cannot be overstated. By examining the operational health of a fund, ODD helps fund managers identify vulnerabilities or issues that could expose the fund to regulatory fines or reputational damage. These might include:
- Lapses in cybersecurity
- Weaknesses in internal controls
- Governance issues.
ODD is essential to mitigate these risks and ensure compliance with regulatory standards. Investors are increasingly seeking transparency and assurance regarding a fund’s operational resilience.
A robust ODD process demonstrates to investors that a fund manager is committed to maintaining high operational standards, which helps to strengthen trust and attract capital. Additionally, as investors become more attuned to the potential for fraud in the investment landscape, a rigorous ODD process serves as a deterrent, identifying red flags and protecting both the fund’s assets and reputation.
Challenges related to operational due diligence
Despite its importance, ODD can present significant challenges. Fund managers must navigate a web of regulatory requirements across jurisdictions, including anti-money laundering (AML) protocols and data privacy laws like GDPR. Compliance in these areas demands a structured approach, as any oversight could lead to costly penalties and damage to investor relationships.
Also, the sheer breadth of ODD – from reviewing IT infrastructure and business continuity plans to assessing governance structures – requires a highly specialised skill set. Fraud detection adds another layer of complexity, as fund managers must be vigilant in identifying inconsistencies or lapses in internal controls.
Finally, implementing ODD findings can be resource-intensive, as recommended improvements often involve both financial and time commitments, making the ODD process an operational and strategic challenge.
Fund HQ services and approach
At Fund HQ we provide specialist ODD consulting, led by Olga Romanova, tailored to meet the needs of family offices and asset managers who value the independence of an outsourced specialist. With over 25 years of experience in due diligence and audit across various asset classes, Olga’s expertise ensures that Fund HQ can deliver robust, risk-based ODD assessments.
Fund HQ’s approach to ODD focuses on three main pillars:
1. Review of operational setup
This includes assessing a fund manager’s internal controls, governance structure, IT infrastructure and key operational processes. Olga and the Fund HQ team work closely with fund managers to identify and address any potential weaknesses, offering practical recommendations for improvement. Fund HQ values on-site reviews, as these provide deeper insights into the operational practices of fund managers and foster transparent, constructive dialogue around potential risks.
2. Review of fund documents
Fund HQ carefully examines key documents, such as redemption terms, fee structures and key man provisions, to ensure they offer adequate investor protection. If issues are identified, these are raised with the fund manager, recommending changes that align with industry best practices. These documents are then monitored over time to ensure that any agreed-upon modifications are implemented.
3. Review of key service providers
The ODD process also extends to the fund’s main service providers, including administrators, legal counsel and independent directors. Through reference checks and discussions, Fund HQ ensures that service providers fulfil their obligations effectively. In some cases, a change of service providers may be recommended if they fail to meet operational standards.
Additionally, Fund HQ offers ongoing monitoring services, allowing clients to outsource the oversight of their fund’s operational improvements. This includes annual updates to reflect any changes in the operational setup, ensuring continuous compliance with regulatory requirements and investor expectations.
How we can help
Olga and the team at Fund HQ provides specialised ODD services that empower fund managers to uphold the highest operational standards. Through tailored assessments, ongoing monitoring and a structured, risk-based approach, we support fund managers to navigate the challenges of ODD, helping to safeguard funds and build trust with investors.
In a landscape where operational weaknesses can lead to severe financial and reputational losses, the services we provide are essential for sustainable and transparent fund management. To find out how we can support your fund, get in touch with Olga today.
