Post Summary
The second installment of Convergence's annual Operational Due Diligence survey series, examining how institutional investors, including funds of funds, pension plans, endowments, and foundations, approach ODD practices and processes for their alternative asset allocations.
Manager allocations, both current and new, increased since the 2016 prior study, but the staff and technology resources institutional investors dedicate to Operational Due Diligence increased only marginally, widening the gap between allocation growth and oversight capacity.
Investors should review how thoroughly they evaluate and monitor managers' service provider relationships, particularly for hedge fund allocations, since private equity managers are expected to keep increasing their use of outsourced service providers, making service provider "best fit" a growing consideration.
With managers launching more products and distribution channels, investors should reevaluate the data points and metrics used to assess operational complexity and risk, and should consider implementing a formal scoring process if they have not already, since Operating Model Complexity and Risk Profiling are described as paramount to actively managing an advisor relationship.
Yes. 100% of survey respondents indicated their organization views ODD as a value-adding activity that can improve returns and manage portfolio risk, though the survey expressed concern that investment in resources, processes, and technology to support that view was still building slowly.
Contact George Evans at [email protected] to set up a product demo and receive survey. Press release below.
Convergence Annual Institutional Investor ODD – Operational Due Diligence Survey – 2017 Results
FOF’s – Pension Plans – Endowments and Foundations – Have you invested in ODD from a Tools, Technology and Personnel Perspective? Have you created sufficient capacity and bandwidth to manage Operating Risk?
Convergence is pleased to present the annual results of our 2017 survey focused on Operational Due Diligence (ODD) practices and processes concerning investment allocations by institutional investors to alternative assets. Survey participants include a cross section of institutional investors with respect to type of investor, number of investment allocations to external managers and the amount of new annual allocations to external managers.
Survey findings suggest that a number of Institutional Investors rely upon periodic Manager or Consultant communication and loosely defined processes to monitor Operational Risk and Infrastructure changes regularly. Institutional Investors may have limited resources and tools available to proactively fulfill their Fiduciary responsibility in an environment of increasing regulatory scrutiny and operational Complexity.
Selected highlights of the study include:
Given continued regulatory focus and increasing manager operating complexity, investors should refresh their evaluations of the level of resources (staff and/or technology) dedicated to Operational Due Diligence, as well as their own current written policies and documentation requirements from managers. We note that current manager and new manager allocations have increased since our prior study, but dedicated resources (people and technology) have increased only marginally. Tool sets provided by Convergence lend themselves to small to medium-sized ODD teams challenged by capacity and bandwidth.
Investors should consider reviewing their level of focus and current processes for evaluating managers’ assessment and monitoring of service provider relationships, including manager practices of ongoing monitoring of their service providers, particularly for hedge fund manager allocations. Private equity managers will likely continue to increase their level of outsourced service providers, underscoring the need for this review. Service provider “best fit” is a key consideration.
With the considerable increase in new products and new avenues for product distribution by managers, investors should reevaluate those data points, metrics and sources of information for assessing manager operational complexity and risk. Consideration should be given to appropriate weighting of risk areas for “scoring” purposes, and scoring processes should be considered by those not presently doing such as part of their ODD process. Operating Model Complexity and Risk Profiling are paramount to active management of an Advisor.
Investors should consider reviewing and updating their policies, practices and processes for performing ongoing ODD monitoring and surveillance of hedge fund and private equity manager allocations. Consideration should be given to the level of proactive, data-driven processes in place to perform ongoing ODD.
Although 100% of respondents indicate their organization views ODD as a “value adding” activity that can improve returns and manage portfolio risk, we are concerned that this area is one in which investors may slowly continue to build resources, processes and technology. Investors should consider a complete review of dedicated resources for varied aspects of initial ODD and ODD monitoring and make spending decisions consistent with their assessment of risk across their portfolio, recognizing that manager OPERATING risk profiles are in constant change.
Partnering with Convergence
Convergence focuses on providing Fund of Funds, Pensions, Endowments and Foundations relevant Advisor data – INDEPENDENT of the Advisor.
Convergence enables its institutional investor clients to increase internal efficiencies, reduce third-party consulting costs and enhance ODD responsibilities through the use of customized technology tools which “push” material events communications to those responsible for ongoing ODD.
Institutional investors have a responsibility to their stakeholders to monitor material events in the private funds industry and those specific to their investment allocations. While the level of focus and resources allocated to ongoing ODD is increasing, current processes are generally (1) reactive in nature, (2) dependent upon requesting information or on periodic updates and (3) likely not all-encompassing, even with respect to specific fund allocations.
Convergence has identified 40 operating complexity factors which it captures and creates, all geared toward enabling investors to assess and measure the business risk profile of manager allocations, including the ability to compare and contrast with industry peers.
About Convergence
This 2017 survey was designed and compiled by Convergence, Inc. along with industry practitioners, including certain representatives of survey participants. Convergence, Inc. is a data and analytics firm providing subscription and research data on Registered Investment Advisor infrastructure, positioning ODD teams to evaluate Operating Model Risk.
Convergence has developed a data, analytics and surveillance platform that provides transparency and easily accessible information relating to the business operations and infrastructure of alternative asset managers. Convergence products include technology-based tools used to facilitate manager and industry research, analytics and surveillance across the universe of registered investment advisors, including assessment of their operating and business risk profile, comparisons to peers and competitors and analyses of their service providers. The company’s platform includes dynamic data and analytics on the entire universe of 16,000+
Registered Investment Advisors, 53,000+ private funds and the industry’s ecosystem of 6,000 service providers. The platform includes 2,000+ data points from regulatory filings and news sources and a significant amount of derived analytics and proprietary original content – most notably Advisor operating model COMPLEXITY PROFILING.
Institutional investors use the company’s products to research advisors and their business complexity and operations-related ecosystem prior to and throughout investment allocation. Convergence products benefit institutional investors focused on employing a dynamic, data-based, ongoing process of manager and advisor surveillance. These products, which are customizable based on an investor’s allocations and data specifications, include Market News, Material ADV filing surveillance, Operating Model Research, Service Provider Best Fit, COMPLEXITY profiling, Fund Expense Practices and Redlining of ADV Part 2 Brochures.
Contact George Evans at [email protected] (215-704-7100) to set up a product demo and receive survey.
Key Points
What was the scope and purpose of the 2017 ODD survey?
- The survey targeted institutional investors allocating to alternative assets: Participants included funds of funds, pension plans, endowments, and foundations, evaluated across investor type, number of external manager allocations, and the amount of new annual allocations.
- The survey was designed jointly with industry practitioners: Convergence compiled the study alongside industry practitioners, including certain representatives of survey participants themselves, lending the findings direct practitioner input rather than reflecting Convergence's perspective alone.
- The core concern was fiduciary capacity under growing complexity: The survey frames its findings around whether institutional investors have limited resources and tools available to proactively fulfill fiduciary responsibility amid increasing regulatory scrutiny and operational complexity.
- This was explicitly positioned as the second installment of a recurring study: The survey references "our prior study," confirming this as a direct continuation of the 2016 inaugural ODD survey rather than a standalone research exercise.
- The findings were structured as forward-looking recommendations rather than a static data snapshot: Unlike some other entries in the series, this installment frames its findings primarily as guidance for what investors should reconsider or refresh, rather than as a set of standalone percentage statistics.
What did the survey find about the gap between manager allocations and ODD resources?
- Manager allocations grew faster than oversight resources: Both current and new manager allocations increased since the prior study, while dedicated staff and technology resources increased only marginally over the same period.
- The survey frames this as a widening structural gap, not a temporary lag: The language used, that resources "have increased only marginally," positions the gap as an emerging pattern worth investor attention rather than an isolated year's finding.
- Convergence positions its own tool sets as suited to this specific gap: The survey notes that Convergence's tool sets lend themselves to small to medium-sized ODD teams challenged by capacity and bandwidth, directly connecting the finding to the platform's value proposition.
- The recommendation calls for a refresh, not just an increase: Investors are advised to refresh their evaluation of resources dedicated to ODD as well as their current written policies and documentation requirements from managers, treating both staffing and process documentation as part of the same gap.
- This finding anchors the broader recommendation set that follows: The resource gap functions as the throughline connecting the survey's subsequent recommendations on service providers, scoring, and ongoing monitoring.
What did the survey recommend regarding service provider oversight?
- Hedge fund manager allocations were flagged as a particular area of focus: The survey specifically calls out the need to review how investors evaluate and monitor managers' service provider relationships for hedge fund allocations.
- Private equity's growing reliance on outsourced providers was cited as a forward-looking pressure: The survey notes that PE managers will likely continue increasing their level of outsourced service providers, meaning the review recommendation applies with growing urgency to that fund type as well.
- "Best fit" is introduced as a specific evaluation concept: The survey identifies service provider "best fit" as a key consideration, framing service provider selection as a matter of fit to the manager's specific operating model rather than a generic quality check.
- The recommendation covers both initial and ongoing monitoring: The survey language addresses manager practices of "ongoing monitoring" of their own service providers, extending the recommendation beyond a one-time vendor assessment.
- This recommendation connects directly to a named Convergence product: Service Provider Best Fit is listed among Convergence's current product offerings later in the piece, tying the survey recommendation directly to a specific platform capability.
What did the survey recommend regarding operating complexity and risk scoring?
- Product and distribution expansion was identified as a driver of reassessment: The survey ties its recommendation on complexity scoring directly to the considerable increase in new products and new distribution channels by managers.
- Investors are advised to reevaluate their underlying data points and metrics: The recommendation specifically calls for reassessing the data points, metrics, and sources of information used to assess manager operational complexity and risk, not just the conclusions drawn from them.
- Formal scoring is recommended for investors not already doing so: The survey states scoring processes should be considered by those not presently doing such as part of their ODD process, treating formal scoring as an emerging baseline expectation rather than an advanced practice.
- Weighting of risk areas is called out as a specific consideration: The survey notes that appropriate weighting of risk areas for scoring purposes should be considered, indicating that not all complexity factors should be treated as equally material.
- Operating Model Complexity and Risk Profiling is described as paramount: The survey uses this specific language, positioning complexity and risk profiling as central, not supplementary, to active management of an advisor relationship.
What did the survey find about how investors view ODD's value, and what concern did that raise?
- 100% of respondents view ODD as value-adding: Every survey respondent indicated their organization views Operational Due Diligence as a value-adding activity capable of improving returns and managing portfolio risk.
- Despite unanimous agreement on value, resource build-out remains slow: The survey explicitly states concern that this is an area investors may slowly continue to build resources, processes, and technology, rather than moving with urgency proportional to their own stated view of ODD's importance.
- The recommendation calls for a complete resource review tied to risk assessment: Investors are advised to conduct a complete review of dedicated resources for both initial ODD and ongoing ODD monitoring, and to align spending decisions with their own assessment of risk across the portfolio.
- Manager operating risk is framed as inherently dynamic: The survey closes this point by noting that manager operating risk profiles are in constant change, reinforcing why a one-time resource allocation is insufficient regardless of how much value investors ascribe to ODD in principle.
- This finding is the clearest evidence of a say-do gap in the survey: The contrast between unanimous stated value and marginal resource growth is the sharpest single data point in this installment, more so than any individual statistic.
What does this survey reveal about Convergence's platform and product positioning in 2017?
- The platform covered a substantial universe even at this stage: Convergence's platform included dynamic data and analytics on 16,000-plus Registered Investment Advisors, 53,000-plus private funds, and 6,000 service providers, drawing on 2,000-plus data points from regulatory filings and news sources.
- Complexity profiling was already the platform's most notable proprietary output: The piece specifically calls out Advisor operating model complexity profiling as the most notable derived analytic and proprietary original content on the platform at the time.
- 40 operating complexity factors were identified as of this survey: The piece states Convergence had identified 40 operating complexity factors geared toward assessing and measuring the business risk profile of manager allocations, including peer comparison capability.
- Several named products map directly to the survey's recommendations: Market News, Material ADV filing surveillance, Operating Model Research, Service Provider Best Fit, Complexity Profiling, Fund Expense Practices, and Redlining of ADV Part 2 Brochures are listed as the specific, customizable products available to institutional investors.
- The positioning already emphasized independence from the advisor being evaluated: The piece states Convergence focuses on providing relevant advisor data independent of the advisor itself, a framing that remains consistent with current platform positioning around unbiased, filing-based intelligence.