Jason A.Scharfman – Hedge Fund Operational Due Diligence

Jason A.Scharfman – Hedge Fund Operational Due Diligence

Description

How to identify and monitor critical operational risks in hedge funds

The scandals surrounding hedge funds are making headlines. It is imperative to examine both operational and financial risk. How to detect and evaluate frequently-Multiplier risk is an overlooked operational risk factor in hedge funds.-Vaporware, organizational nesting, jurisdictional regulatory coordination and organizational nesting. Hedge Fund Operational Due Diligence Includes real-world examples drawn from the author’s experiences dealing with the operational risks of a global platform of over 80 hedge funds, funds
Hedge funds, private equity and real estate managers.

Table of Contents

Preface.

Chapter 1. What is Chapter 1? Operational Risk?

An Intense History.

Modern Definition of Operational There is always risk in taking a Hedge Fund Context.

Operational Due Diligence Compare Operational Risk.

The Key Areas

External Risks

Internal Risks

Fund Terms.

Transparency in reporting

Mixed Risks

The Five Themes.

Chapter 2. Chapter 2. Operational Due Diligence.

What should investors care about? Operational Risk?

Morton’s Fork Or A Hobson’s Choice?

Outright Fraud Still Exists.

Hedge Fund Fraud cannot be modelled.

Even small discrepancies can add up.

Lack Of Standardized Regulation.

Each Hedge Fund It’s different.

The ability to generate an informational edge.

Potential to Reduce Losses and Increase Returns

Take into account Operational Risk Factors Offer A Different View Of A Firm.

Common Misconceptions

Other Considerations Operational Quality.

A Study in Operational Failure: Bayou Hedge Fund Group.

Affiliated broker dealer

There are large discrepancies between the performance of offshore and onshore funds.

Broker Dealers: Declining Capital

Board of Directors: Members and Actions

Brokers: Lavish expenses-Dealers.

Fake Audits – Prepared by A Phony Audior

Background questions

Communication is not effective with investors

Ties to People Barrered from The Securities Industry

Revision of Marketing Materials that are in Conflict

Other anomalies

Chapter 3. Who is qualified to perform an Operational Due Diligence Review?

Essential Skills.

Primary Skills

Primary, Secondary, Mixed, and Other Skills.

In-Outsourcing vs. House.

Evolution Of Independent Operational Rating Agencies.

Benefits of Third-Partie Rating Agencies.

Criticisms of Third-Partie Rating Agencies.

Factors to consider before you perform an operation Operational Review of A Hedge Fund.

Chapter 4. Chapter 4. Operational Profile.

When is An Operational Due Diligence Review begin.

Documentation.

The Piñata Problem.

Due Diligence Questionnaire:  To Use Or Not To Use?

Background Investigations

There are other considerations.

Important importance of on-Site visits

Which Office Do You Need To Visit?

Manager Interview Process.

What topics should I discuss during an On-Site Review

Here are some examples of topic questions.

Which order should these topics be covered?

Customer Reviews of Service Providers

Qualitative Operational Report: Documenting the Operational Data.

Chapter 5. Example of how to evaluate gray areas

Scenario 1: It Was Not Me–Hedge Fund Manager Claims It Is A Mistaken Identity

Scenario 2: It Was Me But, Everyone Was Doing It–Are Regulatory Witch Hunts Real?

Scenario 3: It Was Me But, I Did Nothing Wrong–Manager Proved Not Guilty.

Scenario 4 The Low Profile Hedge Fund Manager–Is No News Good News?

Scenario 5: The Infrastructure Outsourcer–Can An Administrator Do Everything?

Scenario 6 – The Mountain Climber: Can Plans for Large Fast Growth Make You Feel Lost?

Scenario 7: The Stumbling Giant–Can A Large Manager Lose Sight Of Small Controls?

Scenario 8: The Apologetic Headmaster–Are Junior Staff As Informed As Senior Management?

Chapter 6. Ten Tips to Help You Perform an Operational Due Diligence Review.

Tip 1. Tip 1.

Tip 2. Tip 2. Get out of the Conference Room

Tip 3. Tip 3.

Tip 4. Phantomware should be avoided

Tip 5. Tip 5.

Tip 6. Tip 6.).

Tip 7. Tip 7.-Sample and Out of Sample References

Tip 8. Credit Analysis. Are the Funds Financially Viable.

Tip 9. Long-Term Planning: Staff retention, succession planning, and more

Tip 10. Tip 10.-Is it Active or Reactive??

Chapter 7. On-Go Operational Profil Monitoring

How often should background investigations need to be renewed?

Remote Operational Due Diligence Monitoring.

Media Monitoring.

Litigation and Regulatory Monitoring

Hedge Fund Communication Reviews.

Assets under Management and Performance Monitoring

Operational Events.

Magnitude of An: The Effects Of Discovery Operational Event.

On-Site Visit Frequent and Operational Events.

Developmental Operational Traps.

Multi-Inter- and Juisdictional-Coordinate the regulatory activities of all jurisdictions

Silo Creation.

Organizational Nesting.

Chapter 8. Techniques For Modeling Operational Risk.

Scoring Systems

Building a Scoring Systems: Category Determination

Categories Definitions.

Categories Definitions: Combinations Of Approaches

Category Weight Assignment

Weighting Aggregation Model.

Weighting Disaggregation model.

WAM versus WDM.

Consistency in Category Weight and Re-Weighting Considerations

Get it now Jason A.Scharfman – Hedge Fund Operational Due Diligence

Factor marginalization.

The Determination of Category Scales and the Meaning of Scores

Threshold Self-Assessment and determination

Take the Assignment.

Discretionary Penalties, Bonuses.

Discretionary Magnitudes.

Score Aggregation: Sum totaling and weighted averages

Critiques about scorecard models

Scorecard models have many benefits.

Visualization Techniques.

TreeMapping.

Chapter 9. Chapter 9. Operational Incorporating Risk Consideration into the Portfolio Construction and Asset Allocation process

Pro-Graphical Universe Creation: Active Monitoring

Pro-Active Management Operational Risks.

Protecting against Conglomeration Risks: Multivariate Commonality Analysis.

Operational Directional Views

Example of Multivariate Commonality Analysis.

The First Objective: To achieve total diversity.

Second Objective: FSA Overweight Goal.

Third Objective: FSA Underweight Goal.

Conclusions Of Scenario Analysis.

Take into account Operational Reviews in The Hedge Fund Portfolio Rebalancing Process.

Operational Drag.

Meta Risks

Operational Factor.

Operational Scenario Analysis.

Can Operational Can Risk be Completely Eliminated?

Factoring Operational Risk Into Total Risk Calculations.

Beyond Scorecard Approaches, Discounting Expected Return

Discounted Expected Returns Operational Factor.

Operational Haircuts.

Expected Return and Operational Risk.

The Expected Return Shape Operational Risk Curve.

Second Operational Threshold.

Final Thoughts.

Chapter 10. Chapter 10.

Consultants are more popular.

Background Investigations and Canned Information are being made a commodity Operational Due Diligence Reports.

Increased Reliance On Service Provider Consulting Services

Capturing Hedge Funds provided by service providers and employees

Hedge Fund Audit Certifications.

Operational Activism.

AU 332 and FAS 157

The Development of Hedges Operational Risks.

Links Between Operational Analysis of Risk and Analysis

Proposed Re-Regulation of the Hedge Fund Industry.

Index.

Information about the Author

Graystone Research at Morgan Stanley is the Director for JASON A. SCHARFMAN. His responsibilities include analysing and reporting on operational risks in alternative investments like hedge funds, hedge funds funds, private equity and private equity. He also makes recommendations to the firm’s investment committee based on that analysis. He has published on the topic of operational due diligence as well as on travels. He also speaks globally on risks associated with hedge fund operations.

Reviews

“Informative book by Jason Scharfman, on, well, pretty much everything you need to run a hedge fund…Scharfman also explains the reliance on technology that is becoming ever more apparent in hedge funds, the dangers of phantomware, and questions that should be asked before committing to any new technology.” (hedgeco.net(January 26th 2009, 06:00 p.m.

“In his book, Jason Scharfman identifies these operational risks and recommends a strong and innovative “operational” Due diligence review program is the best defense against them. His book describes a step-by-step process.-By-Step-by-step guide for investors on how to efficiently detect and evaluate often-overlooked operational risk factors in hedge funds and other investments in order to provide hedge funds and their investors with the skills to understand and hopefully mitigate these risks.” (The Hedge Fund Law Report(January 8, 2009).

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