Key points
- Operational due diligence (ODD) reviews how a fund is run: valuation, trading operations, compliance, service providers, cyber security and continuity.
- Many institutional allocators have a separate ODD team that can veto an investment the investment team likes.
- The core pack: offering documents, audited financial statements, a completed DDQ, compliance manual, valuation policy and service provider confirmations.
- Allocators expect the pack in a controlled room with view-only access, watermarks and a record of access.
- Keep one master DDQ and update it quarterly; stale answers are a common finding.
Investment due diligence asks whether a manager can make money. Operational due diligence asks whether the money is safe while they do. Pension funds, endowments, foundations, funds of funds and consultants run an ODD review before every new allocation and repeat it every one to three years for existing managers.
What the review covers
| Area | Key questions | Typical evidence |
|---|---|---|
| Governance | Who controls the fund and the manager? | Organisation chart, board composition, key person terms |
| Valuation | Who prices hard-to-value positions, and how? | Valuation policy, pricing committee minutes |
| Trading and operations | Is there segregation between trading and settlement? | Trade flow description, reconciliation process |
| Service providers | Are the administrator, auditor and prime broker independent and reputable? | Confirmation letters, service agreements |
| Compliance | Are rules written down and tested? | Compliance manual, code of ethics, regulatory filings |
| Cyber security and continuity | Can the fund operate after an outage or a breach? | Security policies, BCP and disaster recovery plan |
| Financial | Do audited statements match reported performance? | Audited financials, monthly NAV statements |
The document pack
Managers who raise regularly keep a standing ODD pack and refresh it each quarter:
- Offering memorandum and supplements
- Subscription documents
- Audited financial statements, usually three years
- Monthly investor letters and performance reports
- Due diligence questionnaire (many managers use the AIMA template)
- Compliance manual and code of ethics
- Valuation policy
- Service provider list and confirmation letters
- Information security policy and business continuity plan
- Regulatory filings where applicable (for example Form ADV for SEC-registered advisers)
How the review runs
- Document requestThe allocator sends a request list or its own questionnaire; the manager shares the standing pack in the data room.
- Desk reviewThe ODD analyst reads the pack, checks the DDQ against the documents and drafts follow-up questions.
- On-site or video visitMeetings with the COO, CFO, compliance officer and operations staff; walk-throughs of trade flow and valuation.
- Service provider checksDirect confirmation with the administrator, auditor and sometimes the prime broker.
- Report and decisionThe ODD team issues a rating or a pass/fail; open issues may become conditions of investment.
Sharing the pack securely
Allocators are regulated firms and expect the same discipline from the manager. Emailing PDFs of audited statements and performance attribution gives up control the moment they are sent. A data room lets investor relations decide which prospect sees which folder, keep performance files view-only, watermark each page with the reader’s name and prove later who saw what.
Because many allocators also review the vendor that hosts the manager’s data, certification matters.
Security credentials across the 16 data rooms we review
Count of platforms listing each item.
Folder structure for an ODD room
| Folder | Prospects | Existing investors |
|---|---|---|
| 1 Offering documents | View | View |
| 2 Audited financials | View-only | View-only |
| 3 Performance and letters | Summary only | Full monthly letters |
| 4 DDQ and policies | View-only | View-only |
| 5 Service providers | View | View |
| 6 Investor reporting | No access | Statements per investor |
Separate groups for prospects and existing investors stop monthly statements reaching people who have not invested, and let you remove a prospect’s access in one step if they pass.
Who reads the pack
A typical ODD room: who sees what
| Folder | Prospects | Existing LPs | Consultants | Auditors |
|---|---|---|---|---|
| Offering documents | View only | Download with watermark | View only | View only |
| Audited financials | View only | View only | View only | View only |
| Performance and letters | View only | Download with watermark | View only | No access |
| DDQ and policies | View only | View only | View only | No access |
| Service provider letters | View only | View only | View only | View only |
| Investor statements | No access | Download with watermark | No access | No access |
No accessView onlyDownload with watermarkFull
How long a review takes
A typical operational due diligence review
Typical length: about 6 weeks.
- Request and pack (1 week)The allocator sends its list; the manager opens the standing pack the same week.
- Desk review (2 weeks)The analyst reads the pack, tests the DDQ against the documents and sends follow-up questions.
- Visit and interviews (1 week)COO, CFO, compliance and operations meetings, on site or by video.
- Provider confirmations (1 week)Direct checks with the administrator, auditor and prime broker.
- Report and decision (1 week)Rating, conditions and the allocation decision.
How allocators rate managers
Most ODD teams issue a rating rather than a narrative. Scales differ, but they usually map to three outcomes:
| Outcome | What it means | What the manager does next |
|---|---|---|
| Pass | No material issues | Annual or periodic refresh |
| Conditional pass | Issues that must be fixed, often by a date | Fix, document the fix in the room, confirm in writing |
| Fail | A material weakness | Allocation stops; a later review is possible after changes |
Red flags that lead to a fail
| Finding | Why allocators care |
|---|---|
| The portfolio manager also controls valuation | Prices can be marked to flatter performance |
| No independent administrator | No outside check on NAV and cash |
| One person can move cash alone | Fraud and error risk |
| Auditor changed recently with no explanation | Possible disagreement over accounts |
| DDQ answers that contradict the documents | Weak controls or careless disclosure |
| No tested business continuity plan | Operations stop after an outage |
Security credentials allocators look for, across the 16 rooms we review
Keeping the pack current: a quarterly calendar
ODD findings are often about staleness, not gaps. A simple calendar keeps the standing pack accurate between reviews.
| When | Update |
|---|---|
| Every month | Investor letter, performance report, NAV statement |
| Every quarter | Master DDQ, AUM and headcount, key personnel changes, service provider list |
| Every year | Audited financial statements, compliance manual review, BCP test results, Form ADV where applicable |
| On any change | Key person departure, new administrator or auditor, regulatory matter: update the DDQ the same week |
Questions to expect in the visit
- Walk us through a trade from order to settlement and reconciliation.
- Who prices level 3 positions, and who reviews those prices?
- Who can move cash, and how many signatures does it need?
- How do you monitor personal trading by staff?
- What happened in your last business continuity test?
- How do you control access to investor data, including in your data room?
What is the difference between investment and operational due diligence?
Investment due diligence looks at the strategy, the team's skill and the return potential. Operational due diligence looks at how the fund is run: controls, valuation, service providers, compliance and continuity.
How long does an ODD review take?
Commonly four to eight weeks from the document request to a decision, longer if there are open issues or an on-site visit to arrange.
What is the AIMA DDQ?
A standard due diligence questionnaire published by the Alternative Investment Management Association, widely used by hedge fund managers to answer allocators in one consistent format.
Can an ODD team veto an investment?
At many institutions, yes. A fail rating from operational due diligence stops the allocation even if the investment team wants to proceed.
How often do allocators repeat ODD?
Typically every one to three years for existing managers, and whenever there is a material change such as a new administrator or a key person leaving.
What is a conditional pass?
An ODD outcome where the allocation can go ahead once named issues are fixed, often by a set date.
Should the DDQ be downloadable?
Many managers allow watermarked downloads for existing investors and keep it view-only for prospects.
