Long-only strategies or traditional asset classes are considered less risky, so consequently, long-only asset managers do not need to be subjected to in-depth operational due diligence (ODD) – or is it really so?
Such an opinion was common prior to events in the industry that proved it wrong and reminded investors that ‘less risky doesn’t mean there is no risk.’
Why ODD on traditional assets does make a sense
Long-only asset managers are often strictly regulated, and the information about the organizations and their portfolios are in general available through public and private databases, reports and announcements. Industry practices for long-only managers are quite firmly set-up, and there are fewer unknowns than at alternative ones. Long-only strategies are also less complex than the alternative ones, so asset owners tend to apply less scrutiny on ODD matters.
However, even stable firms with a long tradition on the market can have their operating downsides. With the size and complexity of the business organization, the risk of operational issues inevitably increases. And even if an investment strategy is on the conservative, ‘safe’ side, it can fail due to the operational malfunctions.
That’s why the ODD for long-only must ensure, just like for alternatives and hedge funds, that people, technology, infrastructure, processes, and compliance are well-set to support the strategy.
ODD on long-only investment managers – still emerging, but turning into practice
Indeed, nowadays, there is an increasing number of asset owners and investment consultants trying to put equal effort into operational due diligence irrespectively of the asset class. Allocators are keener in verifying asset managers that are following the processes and the best practices.
What to focus on when creating an ODD questionnaire for long-only managers?
In our previous article Operational Due Diligence on External Fund Managers – Is It That Important?, we explained which areas should operational due diligence cover, and provided you with the list of sample questions for an ODD questionnaire.
Some of the questions may change and be specific to the asset class itself but the main areas to assess remain the same: Governance, Risk management, Services Providers, Technology…
Conclusion
Operational due diligence for long-only equity strategies should be as important as when applied to private equity or hedge fund strategies.
At Dasseti, regardless of the asset class and type of strategies, we provide customizable, flexible technology tools to help asset owners and investment consultant streamline their ODD work when assessing asset and fund managers.
If you are interested in finding out more about the tools that can help you increase the efficiency and reduce the possibility for mistakes at your due diligence please contact us.
