Experience
Experience is critical when assessing hedge fund operational risk. No two managers are the same, and funds cannot be reviewed using a mechanical checklist or a simple, "one size fits all" approach. A careful, experienced perspective is needed to assess the relative strengths and weaknesses of each fund structure, judging controls against evolving benchmarks and best practices.
Castle Hall's team draws on the experience of almost 1,000 operational due diligence reviews of managers, single strategy hedge funds, fund of funds, administrators and service providers. This industry leading knowledge and experience is the foundation of every Castle Hall due diligence review.
Flexibility
For most allocators, the workload of the investment team is not always smooth and predictable. Managers may close, or capacity may become available, at short notice; a new investment theme may emerge; or research on a number of new funds may crystallise at the same time. Outsourced due diligence can held avoid bottlenecks in the investment process, particularly during busy periods such as a new fund launch.
Independence
In the aftermath of the Madoff fraud, investors realize that independence is the single, most important element of the due diligence process. At Castle Hall, we are proud to offer a unique, unconflicted model which unambiguously aligns our interests with those of our investor clients.
The independence - and therefore effectiveness - of operational due diligence is impacted by two conflicts of interest. Firstly, there is an "investment versus operations" conflict in any asset management or asset advisory business. If firm income (and ultimately survival) depends on finding managers with good performance, operational risks may be outweighed by the need to allocate to managers with attractive track records. Secondly, there is a clear conflict of interest if a hedge fund consultant provides services to both hedge fund managers as well as investors.
Castle Hall does not manage assets, perform investment analysis, or recommend funds based on investment performance. Our fees are based solely on a fixed cost per review and are not influenced by client assets, performance or whether we pass or fail a fund. We therefore avoid any "investment vs. operations" conflict: irrespective of the investment case, we provide an objective assessment of a fund's operational quality.
Castle Hall's business model also creates a direct alignment of interests with our clients as we are paid only by the investor, never by the manager.
As we follow only an "investor pays" consulting model, we are always free to highlight operational deficiencies as well as strengths. If necessary we can, of course, "fail" hedge funds which do not meet our operational criteria. Moreover, each Castle Hall due diligence report is provided only to our investor clients, not the manager: this means we have no need to "sanitize" our reports or have them approved by the manager prior to release.
Unlike many industry consultants, Castle Hall has also made a deliberate decision not to provide services to hedge fund managers. This avoids the untenable situation of an investor requesting operational due diligence on a manager who is also a consulting client.
Castle Hall does not audit hedge funds, act as a compliance consultant, write due diligence questionnaires, assist with fund launches, sell legal advice, act as a director, provide an outsourced back office or provide any form of third party marketing services. As the industry's largest due diligence provider, we are fortunate to have the resources and stability which allow us to focus solely on our work serving investors: we do not need to accept conflicted engagements from the manager community.