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Due Diligence Matters – June 2024

perfORM is an award-winning, international (UK, Switzerland, USA) and standalone Operational Due Diligence solutions provider with 100+ years of collective ODD experience.

Please contact us for more information or to receive sample ODD Reports. Over 225 operational due diligence reviews have been completed since the start of 2023.

Due Diligence Clinic – we encourage Allocators, Investment Managers and Services providers to book in a virtual (and confidential) appointment (no fees applied) with one of our experienced practitioners, to discuss due diligence related challenges or questions.

Missed the last e-bulletin? Click here for the May 2024 edition.

The rise of Separately Managed Accounts 

By James Newman, Co-Head and Co-Founder

Why SMA?

The popularity of segregated mandates amongst the hedge fund community seems to be at an all-time high. As recently noted at a ODD roundtable hosted by a prime broker in London, multi-PM managers are actively seeding spin outs with SMAs (some 35% of 2024 launches) and more than 50% of new hedge funds launched since 2020 did so with an SMA.

Whilst the commingled fund structure offers more simplicity to manage clients’ funds, the SMA route provides emerging managers quick access to managing funds via an advisory arrangement and avoids the often painful pursuit of ‘shoe-horning’ investor funds into a fund structure with differing investor needs and tax considerations.

For the investor, the SMA structure allows a high degree of customisation, transparency and control. The benefits typically include direct access and ownership of funds, removing the risk of misappropriation of funds; the ability to quickly pivot investment strategy to meet the investor’s requirements; full visibility into the portfolio and transactions; the ability to implement preferred custodian/accounting arrangements; and more frequent manager interaction (think daily vs once a month!). In addition, SMA investors avoid issues arising as a result of other investors, such as redemptions, with the subsequent potential impact on liquidity and cost, and side letters conferring preferential treatment. And some investors will ensure a financial alignment between themselves and the advisor that goes beyond simply paying an advisory fee.

For a manager, while running a managed account on behalf of an institution that would otherwise not invest has obvious benefits, it can also present challenges. Each SMA brings its own administrator and prime broker(s) to communicate and integrate with. Each requires operational oversight, often including specific investment restrictions, and adequate know-how and resources are required to detect and report on breaches. If the SMA is linked to a ‘reference fund’ and/or a benchmark, this must be monitored, and measures put in place to ensure appropriate trade allocation, rebalancing and monitoring, all of which can be operationally burdensome.

Why ODD?

Whilst the fraud risk presented by commingled funds is nullified by an SMA (although this risk is, in any case, much lower in the industry generally post-Madoff), SMAs are often the vehicle of choice for early-stage managers. Keen to raise capital, these managers may be keen to bag top tier institutional clients but, by dint of their newness, tend to have fewer resources to deploy in setting up the business, such as an operationally experienced COO, let alone a CFO or CCO, and may lack appropriate segregation of duties as a result. This may not translate into what institutions require in terms of compliance procedures, governance, conflict of interest oversight, oversight of outsourced functions, cybersecurity, training, etc. An ODD review is therefore essential to assess whether these emerging managers have what it takes to competently take on an SMA and protect a client’s interests, both in terms of financial performance but also in terms of operational risk mitigation, “ORM” as we refer to it at perfORM. 

ODD Report Solution

Our ODD Report Solution is not just another tick in a box, it is an innovative approach to operational due diligence. A pragmatic solution for Investment Managers and Service Providers which engage us to complete an ODD review.

  • Investment Manager: Hyperion Decimus, LLC – please contact here to request access to our March 2024 dated ODD Report
  • Investment Manager: Coral Cove Capital Ltd – please contact here to request access to our January 2024 dated ODD Report
  • Investment Manager: MARK Capital Management LP – please contact here to request access to our November 2023 dated ODD Report
  • Investment Manager: Wincent Capital Management Limited – please contact here to request access to our September 2023 dated ODD Report
  • Investment Manager: Hivemind Capital Partners UK LLP – please contact here to request access to our September 2023 dated ODD Report
  • Digital Asset Service Provider: Copper Technologies (Switzerland) AG – please contact here to request access to our March 2023 dated ODD Report [undergoing annual renewal review process]