SD-03.3 — Fund Operational Due Diligence (ODD)

Business Domain: BD-03 Manager & Fund Investment (Front office) · Applies: BOTH

Purpose

Assesses a manager’s operations, controls and service providers — independently of investment merit. Operational due diligence investigates the non-investment infrastructure around a manager or fund: does the firm have the controls, the service providers and the integrity to be trusted with the institution’s capital. It is a distinct, separately-staffed discipline — the discipline the Madoff fraud is the standing reminder for — and it carries an operational veto: ODD can block an investment the investment-diligence team favours. Its depth scales with the vehicle: light for a long-only segregated mandate from a large regulated manager, deep and central for a hedge fund or private fund.

Service Operations

• Verify service providers — independently confirm the fund administrator, auditor, prime broker(s), custodian and legal counsel, directly with the providers.
• Assess the valuation policy — review the valuation methodology, the consistency of its application, the use of independent pricing agents, and the valuation-committee governance.
• Assess cash controls — verify segregation of duties, dual-signatory requirements, and whether cash movement is independently authorised by the administrator rather than the manager.
• Review NAV and reconciliation — the reconciliation cadence, NAV calculation and sign-off, break resolution and shadow-accounting.
• Assess counterparty, cyber and continuity risk — counterparty and prime-broker exposure, IT and cyber security, the business-continuity and disaster-recovery plans.
• Issue the ODD opinion — a pass / fail or red-flag rating with remediation conditions, and the operational veto where the risk is unacceptable.

Inputs and outputs

• Inputs: the operational sections of the diligence questionnaire (the AIMA DDQ operations modules); service-provider contracts; audited financials; the valuation policy; business-continuity documentation; SOC reports.
• Outputs: the ODD report and opinion, with any remediation conditions or operational veto — consumed by SD-03.2 (the selection recommendation) and the investment committee.

Entities

• Consumes: Legal Entity (E-01) — the manager and its service providers as roles; Fund & Vehicle (PM-01).
• Owns: none — the ODD report is an analytical artefact.

Standards

• The AIMA Due Diligence Questionnaire operations, risk, technology and business-continuity modules; the ILPA DDQ operational sections. The CFA Institute treats operational due diligence as a discipline distinct from investment due diligence.

Open extensions

• A diligence / DDQ record entity.
• The applicability scales with vehicle type — BOTH, but materially deeper for alternatives than for a regulated long-only mandate; whether the model should signal that gradient.