A hedge fund manager's refusal to provide adequate transparency is the top reason an investor will veto an investment, Deutsche Bank's global prime finance group's third annual Operational Due Diligence survey said.
Twenty-two percent of respondents said managers' refusal to provide adequate transparency in areas such as trade processing, controls over cash movement, valuation processes and service provider relationships is grounds for a veto.
Other red flags respondents cited were inadequate compliance policies, poor segregation of duties, lack of experience in critical roles and inappropriate valuation policies.
Also, respondents indicated that managers' expenses, valuation policies, and compliance and regulatory frameworks are under increasing scrutiny.
Sixty-eight percent of respondents also indicated a willingness to invest with an emerging manager and 81% indicated a willingness to provide constructive feedback to managers.
“Investors increasingly access hedge funds as part of a broader set of portfolio solutions which deliver superior risk-adjusted returns,” said Scott Carter, managing director and co-head of global prime finance and distribution, Americas, in a news release.
Seventy investors with a $730 billion total hedge fund allocation, including consultants, endowments, public pensions, government organizations, insurance companies, funds of funds, private banks and family offices responded to the survey.