Institutional investors should increase their focus on operational risk processes when selecting hedge fund managers as the rapid increase of inflows into alternative investments continues. According to a recent survey commissioned by The Bank of New York in association with Amber Partners, the rapid maturation of the hedge fund industry’s infrastructure has increased the need for institutions to assess the operational systems of their potential hedge fund managers.
Investors also need to put into place stringent due diligence procedures to ensure regulatory compliance and to monitor business practices. David Aldrich, head of securities industry banking at BNY in London, said “investors must increase their focus on assessing the operational risk of their investments and not wait for either the regulators or an unexpected problem to surprise them.” He added that good operational due diligence will help avoid funds that may suffer from underperformance due to weak controls, frequent errors and poor internal information. “Investors who consider operational factors will make better informed investment decisions and receive more secure returns.”