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20 Jul 2009

Fund Of Hedge Fund Operational Due Dillegence - Study

Jason Scharfman, Managing Partner at Corgentum Consulting, LLC, sent me a recently completed a study focused on operational risk frameworks in fund of hedge funds, 'Analyzing Operational Due Diligence Frameworks In Fund of Hedge Funds.'

In short, they analyzed and surveyed over 275 hedge fund allocation organizations (primarily fund of funds) around the world with a variety of AUM (39% managed less than 1 billion and 61% managed more than 1 billion) to study their operational due diligence frameworks:

Some of the key findings include:
Only 27% of Fund of Funds have a full time person on staff or team dedicated to fraud detection

Less resources are dedicated to operational due diligence in the US as compared to the rest of the world (Asia and Europe):

In Asia and Europe there is a trend towards dedicated operational due diligence functions

In North America shared operational due diligence frameworks (where the same people who perform investment due diligence look at operational risk) are the most common

There is lack of consistency in fund of hedge funds operational due diligence approaches

Smaller fund of hedge funds (under USD $1 billion) use a wide variety of operational due diligence frameworks with less dedicated resources

Full report available here.

Jason Scharfman is also the author of the book: “Hedge Fund Operational Due Diligence: Understanding the Risks.”

Hedge Fund Replication Mutual Fund Marks One-Year Anniversary

One of the first no-load, open-end mutual funds designed to replicate broad-based hedge fund performance characteristics, the 'IQ ALPHA Hedge Strategy Fund' (IQHIX) has marked its one-year anniversary on June 30th, 2009.

For the trailing 12-month period, the fund was down -2.58 percent, compared to a loss of -26.21 percent for the S&P 500.

“The performance over the past year can be attributed to a number of factors, including the ability of the fund to hold both long and short positions, and the liquidity of the ETFs used to represent asset class exposures,” said Adam Patti, IndexIQ’s Chief Executive Officer. “As a result, we were able to continuously execute our strategy during the period, something not all hedge funds could do.”

The fund works by optimizing the relative index weights among six hedge fund strategies, Equity Long/Short; Global Macro; Emerging Markets; Fixed Income Arbitrage; Equity Market Neutral; and Event Driven.

The funds do not invest in hedge funds, but use ETFs and a variety of other highly liquid financial instruments to provide exposure to the components of the index in approximately the same weighting. It employs leverage totaling 25 percent of the portfolio to magnify returns.