WHITEPAPER: Quantifying the Value of Operational Due Diligence (ODD)


WHITEPAPER: Quantifying the Value of Operational Due Diligence (ODD)

“Quantifying the Value of Operational Due Diligence (ODD),” unravels fund investing complexities, spotlighting ODD’s core.

What is Operational Due Diligence (ODD)?

Operational Due Diligence as a component of fund due diligence assesses and manages operational risks tied to asset managers and funds. The ODD focuses on non-investment factors like fund structure, controls, compliance, tech, and staff expertise. Essential for investors, ODD ensures a thorough understanding of operational soundness, enabling informed fund allocations and effective risk management. Components of an ODD program include DDQ/questionnaires, background checks, document reviews, onsite visits, regulatory assessments, and reference checks.

In this paper we also touch on how ODD teams are structured – from internal teams, to outsourced and co-sourced ODD teams. The ultimate choice of the ODD team structure for an allocator is shaped by the nature of the fiduciary mandates, availability of internal expertise and resources, and complexities of the investment program. 

What are Key Operational Risk Related Losses?

Drawing lessons from fund failures, referencing a 2003 Capco Study and reviewing 20 failures in recent times from 2002 – 2023, the paper stresses ODD’s role. Most operational risk losses are a function of combination of risk events, and the leading causes include fraud and risk concentration.

How has Operational Due Diligence Mandate Expanded?

Further, we discuss ODD’s evolution from hedge funds to mainstream integration across all assets, embracing ongoing monitoring and expanding focus to topics like AI, cyber risk, ESG, crypto, regulatory compliance, and service provider diligence.

How to Quantify the Value of ODD?

We introduce three concepts to quantify the value: the ROI Approach, Opportunity Cost Approach and the Benchmark Approach, along with the intangible effect of avoiding reputational risks and enhancing investment confidence. Stats from the 2019 JP Morgan Survey reveal 33% of investors avoid managers failing ODD.

Dive into a robust ODD framework for due diligence in external asset manager allocations, examining over 10 non-investment facets.

Gain insights from fund failures and understand ODD’s evolution from hedge funds to mainstream integration.

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