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
Of all the aspects of the due diligence process, independence is the most critical.
Castle Hall believes that there is a profound conflict between investment analysis and operational risk: put simply, what should an investor do if a fund has strong performance (or simply a window of available capacity), but is operationally weak? In many situations, in-house due diligence teams can come under intense pressure to "pass" funds irrespective of operational deficiencies.
Castle Hall does not manage assets, perform investment analysis, or recommend funds based on investment performance. Unlike many consultants, we can therefore avoid the "investment vs. operations" conflict: irrespective of the investment case, we provide an objective assessment of the operational quality of each fund under review.
Castle Hall's business model also creates an unambiguous alignment of interests with our clients. As we follow an "investor pays" consulting model, not the "manager pays", rating agency approach, we are 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.