It has been 20 years since the Alternative Investment Management Association published its first due diligence questionnaire, a template designed to standardize the diligence process by which investors decide if a particular management is right for them.
Now it has published a new questionnaire/template, covering a broader range of entities/strategies. Specifically, for the first time there are questions specifically covering private credit and private equity strategies. The new document also integrates what were formerly separate questionnaires specific to commodity trading advisers and fund of funds managers.
In the words of AIMA’s CEO, Jack Inglis, “The due diligence process has evolved significantly since the first AIMA DDQ was published in 1997. Ever more investors are undertaking significant due diligence processes prior to making an investment. Many alternative investment fund managers have transformed into diversified multi-strategy, multi-product firms seeking investments from a wide range of investors. These factors have created challenges for investment managers and for investors alike. Reacting to these pressures, AIMA has modernized its suite of DDQs, making them more flexible, easier to complete and more data-driven than before.”
The new template explores an investing entity’s governance, operations, and risk management processes in ways that reflect recent consultations with both investors and managers.
The Benefits of Modularity
The template is conveniently modular: meaning that managers will be able to fill out only those sections that apply to their businesses and the products they have on offer.
In explaining the need for the changes, AIMA makes the following points:
- Now as in 1997, it is useful for there to be a standardized set of questions so that investors can compare apples with apples when they’re looking at several managers. On the managers’ side, it reduces the amount of work they have to do, and even the existing of the questionnaire (in the absence of specific requests for its use) helps them match their own practice against industry standards.
- Use of the questionnaire is a good early step in the DD process: it should not be the final step. The answers should allow investors to develop the areas of focus for further inquiries, and they may of course cross-check the answers with data from other sources.
- The modular framework means that the easiest way for a manager to start work on the questionnaire is with either the Basic Open-End Setup or the Basic Closed-End Setup, whichever applies. There are two other possible starting points for other sorts of entity: the Basic Platform Provider Setup and the Basic Sub-Adviser Set-up.
- The new launch is happening over the course of October/November 2017. AIMA expects “it will take most managers several months to work through the new form and fill it in.”
Corgentum’s Two Cents
Corgentum Consulting, a New York- and San Francisco-based consultancy that offers investors its own experience, “over a decade of direct hedge fund and operational due diligence experience,” says on its website that it never asks a hedge fund manager to complete a form DDQ, because it makes use of “a time-tested proprietary approach to create an operational risk profile of a hedge fund from the ground up.”
It says that before asking a hedge fund to complete a DDQ or a request for proposal, investors should bear in mind five key questions:
- What is the goal of the DDQ or RFP?
- How will the investor follow up with a manager who responds vaguely or to a question distinct from the one actually presented?
- How will they determine if a DDQ presented to them by a manager is itself biased in favor of telling them what the manager wants them to hear?
- How will the information from a DDQ be incorporated into the larger DD process?
- How often does this investor anticipate having the manager update the answers to the DDQ?
In general Corgentum is cautioning that some investors are in danger of using the DDQ as a crutch to avoid the work involved in extensive operational; due diligence.