When you get a CFO from a hedge fund and the Head of ODD at an allocator on either side of the table, you can expect some strong opinions to be shared and even some grievances to be aired. That was certainly the case on Day three at GAIM Ops Cayman, when the question had to be asked: ‘Can’t we all just get along?’
One of the biggest irritants surrounding due diligence requests is the constant demand to see agreements that the manager is contractually bound to keep confidential. The ODD head wasn’t making any apologies and said managers need to get comfortable with this and they should try and understand our concerns and the reason we are asking for these documents, rather than taking a belligerent approach. “I don’t really want to see an ISDA agreement but if it is key to the trading strategy then I want to know the sensitivity to these factors and if I am going into a co-mingled fund then I need this info,” he said.
The manager’s best option is to give an indication of how they deal with the issue in question, with a matrix response, while still maintaining confidentiality, the ODD head added, saying that he really doesn’t get a kick out of vetoing people, but his role is to protect the assets of his investors.
Vetoes do happen, however and although every case is unique, typical reasons include a lack of transparency, past regulatory infractions, the afore-noted belligerent attitude or a lack of suitably qualified service providers. “The environment is important and if you walk in and have 20 minor issues then you start to worry about the culture in the organization,” he added. “Are they picking low hanging fruit or going for operational excellence.”
Service providers need to be reviewed and the recommendations here are for annual surveys to evaluate them, however the CFO noted that some relationships are harder to break than others because they embed themselves in your business, like cloud providers, especially with the additional services bolted on. “Fund administration is also hard to get out of so you need to be sure of who you select,” the CFO added.
Timewasting is another bugbear and if people aren’t knowledgeable about the business they are potentially going into partnership with then it can really get annoying, particularly with junior people who maybe don’t understand an issue even after we speak to them, the CFO on the panel said.
Basically, you need to “prepare, prepare prepare”, the ODD head said. “Understand that we want to get behind the strategy, the structure and the risks.” Documentation is vital, he continued adding that notes from last year will be reviewed so anything that was meant to be followed up on should have been. “Managers can prepare by being proactive, understanding in advance what the due diligence professional wants to cover and agree the agenda in advance,” he said. “We don’t expect the manager to be perfect in every way and we will work with you, but it must be a two way street.”