Who isn’t more focused on operational risk management these days? Somebody.
Dec 9th, 2009 | Filed under: Hedge Fund Operations and Risk Management, Today's Post
See no ops risks. Hear no ops risks. Speak no ops risks.
Some 99% of investors and investment consulting firms are more concerned than ever about operational risk management, according to a survey conducted by operational and IT consulting firm the Glass Hammer and Stone House Consulting Group, LLC at a recent conference.
One has to wonder who the 1% “neutral” holdout is, based on the summary of the survey’s findings shown in chart form below. Is that one person in 100 actively trying to avoid addressing any operational issues? ‘Cause this isn’t a good way to go about it. More…
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
Related Posts
- Despite operational risk reporting standards, chasm remains between hedge fund investors and managers
- Alternative Viewpoints: The Ascendancy of Risk Management
- Hedge fund operational failures found to be “material, but not pervasive”
- GAIM Ops Wire: Sunny days for the due diligence crowd
- Alpha Overlay: Employing Active Risk Management
It is quite the conundrum. We all want the infrastructure of a big firm but with the alpha possibilities of a small firm. Even though small firms may have fewer fewer expensive safeguards they might have less personnel turnover. But do the safeguards matter? Madoff was rejected by so many people without needing to do due diligence. What about SocGen?. Infrastructure didn’t help there. What you have here is a classic false positive test. Many good funds will be rejected. Yet there will still be false negatives. There will be blow ups and fraud even with the best infrastructure. I have doubts that this will do anything more than take a few basis points out of investors pockets. That is fees should be lower but are less likely to be with a higher operational bar.
The question in the poll was agreement with this statement: “The importance of operational due diligence has increased” and 1% said “neutral.”
That could, in fact, mean that 1% thought due diligence was EXTREMELY important, and that just because a scandal erupted last year, doesn’t change the relative importance of DD. That’s actually my personal first response to items in the news: blah, nothing’s changed, nothing’s magically more super-important just because it’s making headlines, what’s important is WHAT’S IMPORTANT regardless of what’s in the news.
Why you interpret the 1% neutral as “Is that one person in 100 actively trying to avoid addressing any operational issues?” is beyond me. It could well be that a small minority actually feel they’ve done all that is practical in addressing operational issues and that they’ve reached diminishing returns in terms of ops cost on that issue, and are hitting other issues with their resources. Perhaps they feel they’ve been duly diligent, which is far from trying to avoid the issue.
If you had taken the same poll five weeks before the Madoff scandal hit, you’d have had a different histogram, I think.
It’s entirely possible, and imminently reasonable, to suggest that operational risks HAVE NOT CHANGED ONE WHIT. After all, Madoff and all of the other scandals have been ongoing for years before surfacing. The risks have always been there, only the PERCEPTION has changed. That 1% holdout (not me, FYI, I wasn’t surveyed and shouldn’t have been) probably recognizes that. You know as well as I that in any industry, just as in the general public, we go from fad to fad and from this year’s important subject to that year’s important subject, and the basis of what’s really important doesn’t change.
Thanks for your comment.
Perhaps it is semantics here: I was not suggesting that the 1%, or one individual, felt DD was NOT important. I was stressing (a bit tongue in cheek) that there is one person out there who apparently feels it isn’t MORE important in the post-Madoff, etc. etc. world.
In other words, there really should be 100% agreement that more DD is now he norm.
Maybe it is just semantics, but words have meaning and those meanings are important. Your statement that “there really should be 100% agreement that more DD is now [t]he norm” is a different animal, a different question than the first one asked in the survey.
The world didn’t change because Madoff was exposed. To imply that DD is magically more important now is to imply that DD was magically LESS important two years ago, when Madoff was happily ripping off institutional investors and committing affinity fraud. Try telling a former Madoff investor that DD was less important earlier, back when they were deciding to put their money with Bernie, than it is today. I think our 1% on question one just had long-term perspective.
Back to “there really should be 100% agreement that more DD is now [t]he norm” for a moment, it’s clear that we live in a world where opinion is ruled by fads and by the 24/7 news cycle. Certainly there will be much wailing and gnashing of teeth about ops DD and liquidity and transparency for at least the next several months. But when times are good again, the mass of investors will once more trade liquidity, transparency, and due diligence for a smooth return, a met funding objective, and a reported Sharpe ratio well above 1.00.
And guess what: DD won’t be any less important then, just because it isn’t on everybody’s minds anymore.