The operational due diligence team at Laven Partners, a firm advising the asset management industry on governance and regulations, has set out important points for investors and wealth managers to consider before putting money into funds.

The operational due
diligence team at Laven Partners, a firm advising the asset management industry
on governance and regulatory issues, has set out important points for investors
and wealth managers to consider before putting money into funds. Even the most
simple-looking portfolios might carry risks. Laven Partners has spoken on these
issues in the past at events hosted by ClearView Financial Media, the publisher
of this website, and the editors are pleased to carry these insights. As ever,
readers are most welcome to respond with views and criticisms.

The checklist

Disclosure of information:
the first red flag that should instantly make investors wary of a fund and its
manager is an unwillingness to divulge information about the fund.

Corporate governance:
there are a number of issues which should be considered when looking at a
fund’s corporate governance, particularly when it comes to offshore investment
vehicles. Ideally, the board should consist of independent directors. The
investors should check that the board acts with sufficient integrity. One of
the ways to check that there is sufficient integrity is to ensure that there
are enough checks and controls in place supported by a proper corporate
governance culture. To establish this, the investors should request copies of
relevant board minutes.

Manager’s co-investment:
A manager who can operate without any personal risk is quick to be cavalier
with other people’s money.  It is
important to verify if the manager and other key individuals have their own
money invested in the fund, and how much.

Fees structure:
remuneration policies are a good indicator of a manager’s future behaviour. The
investor should particularly focus on the management and performance fees. The
best metric to identify if the manager is charging unreasonably high fees is to
use the total expense ratio. However, since there are no rules/laws on fees,
the investor should rely on his/her own assessment and examine if the fees are
aligned with the general industry practises.

Risk management:
risk management personnel should conduct regular testing of all risk management
protocols and continuously monitor all risk exposures. It would also be prudent
to obtain prior risk management documentation from the manager and his team to
determine if they have been adequately addressing all market risks in the past.

Service providers:
It is necessary to identify any potential conflicts of interest. First, the
various service providers (administrator, prime broker/custodian) should be
segregated and autonomous to minimize conflicts of interest. In addition, the
quality of third party service providers should be assessed thoroughly.

Key man risks: It
is important to identify the extent of the fund’s reliance on key individuals.
If most of the fund’s operations are conducted by a couple of personnel, the
risk of losing these key individuals should be addressed.

Background checks:
reviewing the biographies of principles and other key individuals should be one
of the first steps undertaken by the investor, as it gives him/her a quick
general overview of the background and amount of experience of those involved.
The first documentation provided to the investor by the manager is the fund’s
marketing presentation, and it usually contains general information on the
manager’s team. It is also sensible to conduct regulatory-level searches and
more complex background checks.