Operational Due Diligence (alternative Investments) - Recent Developments in ODD

Recent Developments in ODD

Madoff Effect and Operational Drag

A 2010 study shows that frauds such as Madoff have created a so-called Madoff Effect by which investors tend to tailor their operational due diligence around recent frauds while minimizing certain other operational risks.

These other risks can include items which effect the overall efficiency and profitability of a hedge fund, a concept known as Operational Drag ® .

Other recent developments:

Where a more nuanced approach to ODD is taken, the benefits accruing to the recipients of the ODD report generally include:

• a team with the experience to ask the right follow up questions and “smell a rat” and the professional credibility to be able to get the right information out of interviewees, interpret this and bring to bear experience of common and best practice;
• quality advice as to the relative negotiating power of the (potential) investor and the manager of the relevant alternative investment fund;
• detailed recommendations regarding conditions which the investor or potential investor may wish to consider negotiating with the manager of the alternative investment fund to reduce the overall level of operational risk associated with a new or existing investment;
• consideration of new and developing risks which are industry-wide, and risks that are specific to the alternative investment fund in question or pertinent to the specific investor;