Operational risk can sink a fund, but who has responsibility for mitigating operational risk—the manager or the board? Investors need to be confident that the respective areas of responsibility are clearly understood by all concerned. If this is not clear, they can justifiably ask, “Who is steering the ship?”
We all know that alternative investment funds have one simple, basic purpose—to grow and preserve wealth. In order to do this, investment acumen is important, but not enough. Academic literature increasingly supports, and life experience tells us, that operational risk can sink a fund. As a result of recent meltdowns and frauds, sophisticated investors have come to appreciate that a focus solely on performance is not enough. After a period in which transparency into investments was demanded and achieved, investors are now seeking to avoid the rapid decline in asset values that can be triggered by an operational misstep and, for this reason, they are focusing on the governance process.
This white paper highlights the key questions that are not being asked with respect to the fund governance process and concludes that the failure to address these issues prevents investors and managers from deriving true value from the costs alternative funds incur to compensate their boards. It also explores the differences between funds organized as Delaware limited liability companies and funds chartered under the laws of other jurisdictions and then weighs the relative merits of each approach.
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