GLOBAL - Institutional investors need to increase their focus on operational risk processes when choosing hedge fund managers, according to The Bank of New York (BNY).
In a recent report it warned the dramatic increase in alternative investments inflows by institutional investors, and the rapid maturation of the industry’s infrastructure, had made this need more acute than ever.
According to the bank, investors should also establish stringent due diligence procedures to ensure regulatory compliance and to monitor business practices. They should not wait for a surprise from the regulators or an unexpected problem, advised David Aldrich, head of securities industry banking at BNY.
Good operational due diligence would help them avoid funds which might suffer from a drag on performance due to weak controls, frequent errors and poor internal information, he said.
The report, “Hedge Fund Operational Risk: Meeting the demand for Higher Transparency and Best Practice” was written in conjunction with operational risk certification firm Amber Partners.
Reiko Nahum, chief executive officer and founder of Amber Partners, commented: “Exciting investor returns may blind the investor to the true infrastructure deficiencies that can exist behind the scenes.”
Hedge funds have dominated headlines recently. Last week the European Central Bank said they were just as likely to trigger a disruptive asset price adjustment in financial markets as adverse geopolitical news or even an avian influenza pandemic.
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