Research by Deutsche Bank reveals a fundamental shift in the nature of the due diligence carried out by hedge fund investors. The firm says that this change is in response to investors demanding greater transparency from managers and seeking rigorous controls across both the front and back office.

The report finds that the role of operational due diligence teams has grown since the onset of the financial crisis. Today, 73 per cent of fund of funds and 80 per cent of consultants have operational due diligence teams that operate independently from their investment due diligence process.

ODD teams now actively veto investments. Reasons cited for such vetoes in the past 18-24 months include lack of independent oversight and valuation issues. Investors are also looking for alignment of interest and expect a significant proportion of a founder’s liquid capital to be invested in the fund. Many investors now expect position-level transparency from their managers both before and after they invest and often include this level of detail in their client reporting.

“Institutions have embraced hedge funds as a source of positive risk-adjusted returns, and this runs hand-in-hand with a greater focus on control and compliance. Investors have a rigorous toolkit of evaluation techniques and hedge funds have responded by vastly increasing transparency and access,” said Daniel Caplan, European head of global prime finance at Deutsche Bank.

Deutsche’s research polled senior professionals at FoFs (79 per cent of respondents) and consultants (22 per cent), in the US and Europe representing $411 billion in hedge fund assets under management.