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Due Diligence Matters - October 2026 Bulletin

About perfORM: Operational Due Diligence Specialists for Investment Managers,  Allocators and Service Providers

perfORM is an award-winning, internationally operating due diligence firm, with presence across the UK, Switzerland, USA, and UAE. We are a standalone ODD solutions provider with 150+ years of collective ODD experience. 

The ‘ORM’ in perfORM stands for Operational Risk Mitigation. 

We serve a global and diverse client base, including: 

  • Investment managers seeking validation of their operational controls
  • Allocators – family offices, multi-family offices, private banks, wealth managers, funds of funds, asset managers, pension funds, endowments, and foundations – requiring robust third-party operational due diligence on their manager relationships
  • Third-party service providers and sports teams

Investor Diversity and Concentration

A portfolio manager recently told me that, after significant outflows caused by volatility in his sector, he understood why perfORM focused so closely on the types of investors in his fund and their share of AUM. Around three quarters of the fund was held by funds of hedge funds (FoHFs). Given the volatility and the fund’s extremely generous redemption terms, most of those investors had redeemed.

One of the risk considerations for perfORM is the expected stability of a hedge fund’s investor base. Most investment managers (IMs), particularly those launching new funds, accept subscriptions from a broad range of investors. FoHFs can often allocate very quickly because they have in-house due diligence expertise. However, while FoHFs can allocate quickly, they may also redeem quickly in response to demands from their underlying investors, whether prompted by perceived poor performance based on monthly published data or by external factors. This was evident during the 2008/2009 credit crunch, when substantial FoHF outflows had knock-on effects for hedge funds, leading some to impose gates, create side pockets or suspend redemptions.

When a hedge fund imposes a fund-level gate, redemptions are restricted for all investors, not only FoHFs. Without a gate, significant outflows may reduce the IM’s AUM below breakeven AUM, potentially leading to cost-cutting. The fund’s expense ratio may also rise as fixed costs represent a larger share of AUM, adversely affecting performance. Funds with substantial FoHF investment are therefore considered to present a higher level of operational risk. Other investor types, including pension funds, insurance funds and endowments, typically manage capital on a longer-term basis and do not report performance monthly, so generally provide more stable capital, although their due diligence may take longer.

perfORM also considers investor concentration, i.e. whether the investor base consists of a small number of large investors, particularly FoHFs: if one of the investors redeems, could this threaten the IM’s ability to continue in business? To avoid such an outcome is the IM likely to adjust its approach to accommodate a large investor, or only seek that investor’s opinion? One IM we reviewed significantly adjusted its fund’s strategy on the basis that its largest investor “was OK with it”. Prospective investors were not informed, and the offering memorandum, DDQ and marketing materials had not been updated when we conducted our due diligence. The change was identified only through our ODD process.

To mitigate investor risk the IM must balance the fund’s redemption terms with the strategy’s liquidity. Offering, for example, monthly liquidity with 30 days’ notice when this does not align with the liquidity of the fund’s underlying investments may attract investors initially but create longer-term problems. Conversely, implementing, for example, an investor-level gate of 25% per quarter, so that it takes an investor a year to redeem, will limit the amount that some investors, and FoHFs in particular, can allocate. While the option to gate and/or side pocket should be stipulated in the offering memorandum, investors expect access to their capital when requested, so using these measures rarely reflects well on the IM.

Overall, although fund liquidity terms and available redemption mechanisms can mitigate the operational risk arising from the investor base, a broad and well-diversified investor base generally reduces that risk further.

perfORM’s ODD Report Solution: Operational Due Diligence for Investment Managers and Allocators 

perfORM’s ODD Report Solution is not just another tick in a box, it is a fast-growing and innovative approach to operational due diligence. A pragmatic solution for investment managers and service providers which engage us to complete an ODD review.

“We believe in operational excellence, doing things ‘the right way’ and holding ourselves accountable for delivering institutional-grade asset management. Working with perfORM to review our processes thoroughly is key to ensuring our investors have independent insight, understanding, and confidence in how we manage their assets. We appreciate the perfORM team’s forensic review of our documentation and processes and look forward to collaborating again” – Investment Manager, ODD Report Solution client

Contact perfORM to discuss ODD support or to receive a sample ODD report.

You can also read our September bulletin edition and watch our new video which introduces perfORM and each of our core ODD services.

ODD Report Solution Clients