Hedge Fund Operational Due Diligence Understanding the Risks

ISBN-10: 0470372346
ISBN-13: 9780470372340
Edition: 2009
List price: $110.00 Buy it from $51.78
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Description: This book will provide the necessary tools to consider operational reviews in conjunction with investment reviews. It will provide a step-by-step guide to the operational due diligence process involving hedge funds. The tentative contents is: (1)  More...

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Book details

List price: $110.00
Copyright year: 2009
Publisher: John Wiley & Sons, Incorporated
Publication date: 12/3/2008
Binding: Hardcover
Pages: 320
Size: 6.25" wide x 9.25" long x 1.25" tall
Weight: 1.540
Language: English

This book will provide the necessary tools to consider operational reviews in conjunction with investment reviews. It will provide a step-by-step guide to the operational due diligence process involving hedge funds. The tentative contents is: (1) What is operational risk?; (2) Why should I care about operational risk; (3) Who is qualified to perform an operational risk; (4) How to create an initial operational profile; (5) Evaluating the gray areas; (6) Ten tips when performing an operational due diligence review; (7) On-going operational profile monitoring; (8) Techniques for modeling operational risk; (9) Bridging the gap: Operational risk reviews in context; (10) Looking ahead: Trends.

Preface
What Is Operational Risk?
Brief History
Modern Definition of Operational Risk in a Hedge Fund Context
Operational Due Diligence versus Operational Risk
Key Areas
External Risks
Internal Risks
Blended Risks
The Five Core Themes
The Importance of Operational Due Diligence
Why Should Investors Care about Operational Risk?
Morton's Fork or a Hobson's Choice?
Outright Fraud Still Exists
Hedge Fund Fraud Cannot Be Modeled
Small Discrepancies Add Up
Lack of Standardized Regulation
Each Hedge Fund Is Different
Ability to Generate an Informational Edge
Potential to Reduce Losses and Increase Returns
Considering Operational Risk Factors Presents a Different View into a Firm
Common Misconceptions
Other Considerations: There Is Not Necessarily a Positive Correlation between Assets and Operational Quality
A Study in Operational Failure: Bayou Hedge Fund Group
Affiliated Broker-Dealer
Large Discrepancies in the Performance of Onshore and Offshore Funds
Declining Capital of Broker-Dealer
Board of Directors: Members and Actions
Lavish Expenses of Broker-Dealers
Fake Audits Prepared by a Phony Auditor
Background Questions
Lack of Investor Communication
Ties to People Barred from the Securities Industry
Revision of Conflicted Marketing Materials
Other Anomalies
Who Is Qualified to Perform an Operational Due Diligence Review?
Essential Skills
Primary Skills
Primary, Secondary, Blended, and Other Skills
In-house versus Outsourcing
Evolution of Independent Operational Rating Agencies
Benefits of Third-Party Rating Agencies
Criticisms of Third-Party Rating Agencies and Operational Due Diligence Providers
Factors to Consider before Performing an Operational Review of a Hedge Fund
Creating an Initial Operational Profile
When Does an Operational Due Diligence Review Begin?
Documentation
The Pinata Problem
Due Diligence Questionnaire: To Use or Not to Use?
Background Investigations
Other Considerations
Importance of Onsite Visits
Which Office to Visit
Manager Interview Process
What Topics Should Be Covered During an Onsite Review?
Sample Topic Questions
In What Order Should These Topics Be Covered?
Service Provider Reviews
Qualitative Operational Report: Documenting the Operational Data
Evaluating the Gray Areas: Examples
"It Was Not Me"-Hedge Fund Manager Claims Mistaken Identity
"It Was Me, But Everyone Was Doing It"-Are Regulatory Witch Hunts Real?
"It Was Me, But I Did Nothing Wrong"-Manager Proved Not Guilty
The Low-Profile Hedge Fund Manager-Is No News Good News?
The Infrastructure Outsourcer-Can One Administrator Do Everything?
The Mountain Climber-Can Plans for Large, Fast Growth Trip You Along the Way?
The Stumbling Giant-Can a Large Manager Lose Sight of Small Controls?
The Apologetic Headmaster-Are Junior Staff as Informed as Senior Management?
Ten Tips for Performing an Operational Due Diligence Review
Avoid Meeting with the Wrong People or the Wrong Groups
Get Out of the Conference Room
Little White Lies Can Turn into Big Problems
Be Wary of Phantomware
Focus on Documentation and Negotiation
Read the Fine Print (Financial Statement Notes, etc.)
Reference Checking: Importance of In-Sample and Out-of-Sample References
Credit Analysis: Are Funds Financially Viable?
Long-Term Planning: Key Staff Retention, Succession Planning, and More
Growth Planning: Is the Manager Proactive or Reactive?
Ongoing Operational Profile Monitoring
How Often Should Onsite Operational Reviews Be Conducted?
Remote Operational Due Diligence Monitoring
Media Monitoring
Litigation and Regulatory Monitoring
Hedge Fund Communication Reviews
Assets Under Management and Performance Monitoring
Operational Events
Effect of Discovery on the Magnitude of an Operational Event
Onsite Visit Frequency and Operational Events
Developmental Operational Traps
Techniques for Modeling Operational Risk
Scoring Systems
Building a Scoring System: Category Determination
Category Definitions
Combinations of Category Definition Approaches
Category Weight Assignment
Weighting Aggregation Model
Weighting Disaggregation Model
WAM versus WDM
Category Weight Consistency and Reweighting Considerations
Factor Marginalization
Category Scale Determination and the Meaning of Scores
Threshold Self-Assessment and Determination
Score Assignment
Discretionary Penalties and Bonuses
Score Aggregation: Sum Totaling and Weighted Averages
Criticisms of Scorecard Models
Benefits of Scorecard Models
Visualization Techniques
Bridging the Gap: Incorporating Operational Risk Consideration into the Portfolio Construction and Asset Allocation Process
Proactive Monitoring: Graphical Universe Creation
Proactive Management of Operational Risks
Protecting against Conglomeration Risks: Multivariate Commonality Analysis
Operational Directional Views
Example of Multivariate Commonality Analysis
First Objective: Total Diversity Goal
Second Objective: FSA Overweight Goal
Third Objective: FSA Underweight Goal
Conclusions of Scenario Analysis
Considering Operational Reviews in the Hedge Fund Portfolio Rebalancing Process
Operational Drag
Meta Risks
Operational Factor
Operational Scenario Analysis
Can Operational Risk Be Entirely Eliminated?
Factoring Operational Risk into Total Risk Calculations
Beyond Scorecard Approaches: Discounting Expected Return
Discounted Expected Returns with the Operational Factor
Operational Haircuts
Expected Return and Operational Risk
Shape of the Expected Return versus Operational Risk Curve
Second Operational Threshold
Final Thoughts
Looking Ahead: Trends in the Space
Increased Use of Consultants
Commoditization of Background Investigations and Canned Operational Due Diligence Reports
Increased Reliance on Service Provider Consulting Services
Capture of Hedge Funds by Service Providers and Employees
Hedge Fund Pursuit of Audit Certifications
Operational Activism
AU 332 and FAS 157
Development of Hedges to Operational Risks
Links between Operational Risk and Credit Analysis
Proposed Reregulation of the Hedge Fund Industry
Index

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