Christopher J. Addy, Castle Hall Alternatives - The Due Diligence Challenge

The Due Diligence Challenge

Institutional allocators and fiduciaries are currently faced with a number of competing objectives and realities as they fulfill their responsibilities to their constituents and beneficiaries.

1. Increasing focus on Governance, Risk and Compliance best practice.

• Best practices dictate implementation of a consistent Operational Due Diligence Policy which is risk-based, covers all asset classes and third-party manager relationships across the portfolio, and incorporates monitoring of the evolving operational risk environment at each manager.

2. Investment objectives and search for yield or performance in a lower-yield and evolving risk environment.

• Investment return objectives often lead to the inclusion of complex asset classes, and emerging managers which are subject to increased operational risk.

3. Fiscal responsibility and constraints.

• It can be challenging to balance increasing GRC requirements, evaluation and monitoring of more complex investments, and human resource capacity and budget.
•Allocators must consider whether to ‘insource’, ‘outsource’ or ‘co-source’.

Due Diligence 3.0

Operational Due Diligence (“ODD”) has changed.

Castle Hall identified “Due Diligence 3.0” as a new operating model in 2014. Since then, this framework has guided the development of our firm, particularly with respect to the implementation of our DueDiligenceProfessionalTM online diligence risk tool.

We have also introduced key service offerings such as OpsMonitor, first launched in April 2015.

The Due Diligence 3.0 framework rests upon four pillars:

• Multi asset class. Due diligence should be applied across all third-party asset manager relationships, not just hedge funds. Fiduciaries now recognize that non investment risks associated with third party asset managers – accounting error, misvaluation, fraud, conflicts of interest – can also occur in private equity, real estate, infrastructure and long only managers.

• Real time monitoring, not just snapshot reports. Traditional ODD was focused on the “report”, prepared on a static, point-in-time basis. Looking forward, investors recognize that monitoring the evolving risks across the portfolio is the foundation of an effective operational risk management program.

• Risk-based approach. Diligence procedures should be calibrated to reflect different risk profiles across asset classes and manager / fund allocations.

• Fintech. The days of spreadsheets are over. Investors and their service partners should aggressively leverage technology to process ever increasing amounts of information and deliver more effective and efficient risk identification, reporting and monitoring.

Due Diligence 3.0 is codified within a Due Diligence Policy. An effective diligence policy – like a valuation policy or compliance manual – considers scope, methodology, authority, reporting lines and process, both at a point in time and over time. A Due Diligence Policy will establish the level of due diligence to be undertaken at each stage of the investment process - screen, onboard and monitor - considering the inherent risk of the asset class and fund structure; the manager specific risk; and the materiality of the investment.

Due Diligence. Solved.

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