Process
Investment due diligence asks whether a manager can make money. Operational due diligence asks whether the money will still be there afterwards. The second question has historically been the more expensive one to get wrong, and we run it as an independent review with the authority to stop an allocation on its own.
Independence of the valuation chain
The first thing we establish is who determines the value of the portfolio and whether that person can be overruled by someone whose compensation depends on the answer. We want an independent administrator producing the official net asset value, pricing sources documented in a written valuation policy, and a clear escalation route for illiquid or stale positions. Where the manager holds assets that require judgement, we want to see the judgement being applied consistently rather than opportunistically.
Custody and cash controls
We confirm where the assets sit and who can move them. That means reviewing the prime brokerage and custody arrangements, confirming account names, and testing the authorisation chain for cash movements — how many signatures, which individuals, and whether the same person can both instruct and confirm a payment. We also ask how third-party payment instructions are verified, because invoice fraud remains one of the more common ways capital actually disappears.
People and segregation of duties
We meet the chief operating officer, the chief financial officer or financial controller, and the compliance officer separately from the investment team. We are looking for people who can describe their own controls without reading from a document and who are willing to tell us what they would fix if the budget allowed. A firm whose operational staff defer every question to the founder has a segregation problem regardless of what the organisational chart says.
Counterparties, leverage and financing
We review the financing arrangements in detail: which counterparties, what margin terms, what triggers allow a counterparty to change those terms, and how concentrated the exposure is. Leverage supplied on terms that can be withdrawn at the worst moment converts a good strategy into a forced seller. We ask managers to walk us through what happens to their book if financing terms tighten by a specified amount.
Technology, records and continuity
We look at the order management and risk systems, how trades are reconciled and how often, what happens when a reconciliation break appears, and where the firm's records live. Business continuity gets a practical test rather than a documentary one: we ask what happened during the last actual outage, not what the plan says should happen.
Documents and terms
The offering memorandum, the limited partnership agreement or equivalent, the administration and custody agreements and the audited financial statements are read in full, including the parts that describe what the manager is permitted to do rather than what they currently do. The gap between the two is the drift risk we would be accepting.
A manager who welcomes operational scrutiny is telling you something about how they run the business. So is one who does not.
How findings are handled
Few reviews come back perfect, and we do not expect them to — particularly with smaller managers where resourcing is genuinely constrained. What matters is whether the gaps are known, prioritised and being addressed, and whether they can be mitigated by structure on our side. We frequently allocate through a managed account, require enhanced reporting, or stage the commitment over several quarters where an operational finding is real but remediable.