Morningstar Operational Risk Flags: Due Diligence Goes Online
| Jul 7th, 2010 | Filed under: Hedge Fund Operations and Risk Management, Today's Post | By: Guest |
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By: Steve Deutsch, AllAboutAlpha.com Editorial Board
Last month, Goldman Sachs was ordered to pay $21 million to the unsecured creditors of Bayou Group by an arbitration panel of the Financial Industry Regulatory Authority. Part of the reason Goldman is paying a fine is that it failed to contact Bayou’s auditors to request additional information on the fund and its holdings. While the Bayou case pre-dates the Madoff fiasco, this is an opportune time to re-examine hedge fund operational risk.
In January, Morningstar introduced operational risk flags and transparency scores into its proprietary hedge fund database and then into “Morningstar Alternative Investment Center Professional”, an online application that accesses the Morningstar hedge fund database. I work closely with those who originated and administer the operational risk flags methodology and, although I’m a little biased, I find it to be a useful tool – particularly given the inconsistent standards used in today’s hedge fund industry.
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Operational Due Diligence specialist beware MorningStar will put you out of business.
The graal that every analyst was looking for in selecting Hedge Funds has been found by MorningStar.
Regulators stop elaborating new prudential rules, you only need to look at 5 factors and you will know if a fund is risky or not.
I agree with the argument that analysts are sometimes overcomplicating the operational due diligence process and that short cuts can be found but it seems to me that the MorningStar approch is really oversimplistic. Investors should only use this score as an additional sreening tool but should be very carefull not to base any investment decision on it.
I regret Hedge Fund Appraisal was not mentionned in your list of Operational Due Diligence service providers.
When Madoff blew-up, Goldman Sachs went on the record saying their own due diligence had alerted them to the fact that they knew there was something fraudulent going on with Madoff. If this is indeed the case, there is a legal obligation to inform the SEC. Otherwise you are breaking the law. It is a mystery why this has not been pursued by the authorities.