“Informative book by Jason Scharfman, on, well, pretty much everything you need to run a hedge fund…Scharfman also explains the reliance on technology that is becoming ever more apparent in hedge funds, the dangers of phantomware, and questions that should be asked before committing to any new technology.” (hedgeco.net, January 26th, 2009)
“In his book, Jason Scharfman identifies these operational risks and recommends a strong and innovative “operational” due diligence review program as the best defense against them. His book outlines a step-by-step guide that shows investors how to effectively detect and evaluate often-overlooked operational risk factors in hedge funds and other investments in order to provide hedge funds and their investors with the skills to understand and hopefully mitigate these risks.” (The Hedge Fund Law Report, January 8, 2009)
Hedge Fund Operational Due Diligence
Understanding the Risks
One need only glance at the cover of the Wall Street Journal or turn on CNBC to learn about the latest debacle befalling hedge funds, due to poor operational oversight and controls. Long viewed by many hedge fund investment professionals as one of life’s necessary evils and a distraction from the “real” business of investing, the field of operational due diligence has finally caught on today as an essential area of hedge fund risk management.
Filled with real-world examples drawn from the author’s experiences dealing with the operational risks of a global hedge fund platform, Hedge Fund Operational Due Diligence: Understanding the Risks clearly outlines a flexible framework to enable you to diagnose a hedge fund’s operational risks. This user-friendly, step-by-step guide shows you how to effectively detect and evaluate often-overlooked operational risk factors in hedge funds, such as multijurisdictional regulatory coordination, silo creation, operational drag, organizational nesting, and vaporware, to equip you with a complete understanding of the importance and benefits of a comprehensive operational due diligence program.
Designed to enable hedge fund personnel to perform self-diagnostic health checks and determine areas in which operational improvements are needed using the techniques described, this timely book:
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Features an analysis of the failed Bayou Hedge Fund Group, highlighting how operational risks can bring down an organization
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Explains how to diagnose and analyze the operational risks that may be present in a hedge fund
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Covers the primary, secondary, and blended operational risk factors present in the vast majority of modern hedge fund organizations
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Offers techniques for the modeling of operational risk
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Explores how to factor the results of operational risk analysis into the overall hedge fund asset allocation process
A strong operational infrastructure serves as a crucial backbone to the modern hedge fund, without which even the smartest money managers in the world could not thrive. Hedge Fund Operational Due Diligence: Understanding the Risks provides you with the necessary tools to effectively consider operational reviews in conjunction with investment reviews.
From the Back Cover
Praise for Hedge Fund Operational Due Diligence: Understanding the Risks
“This book should be required reading for anyone who wants to successfully invest in hedge funds. As operational problems are reputed to cause over 50% of all hedge fund failures, it is essential that hedge fund analysts understand how to conduct proper operational due diligence many firms are only now starting to understand the importance of this skill set. Mr. Scharfman’s book will go a long way towards educating analysts in this critical area.”
Ed Rogers, CEO, Rogers Investment Advisors, LLC
“Scharfman has written an excellent book! Highly accessible . . . covers crucial topics! This book should be read by all analysts who cover the hedge funds space. It also furnishes a very valuable and necessary addition to the MBA finance curriculum. Solid operational infrastructure is exactly what the smart institutional investors are demanding, and rightly so. Scharfman’s book is going to help make a lot of good decisions that is, for those who are prudent enough to read it.”
Dr. Ranjan Bhaduri, Managing DirectorAlphaMetrix, LLC
A straightforward how-to guide for conductingeffective hedge fund operational due diligence
Providing a hands-on, step-by-step guide to the operational due diligence process involving hedge funds, Hedge Fund Operational Due Diligence: Understanding the Risks addresses essential issues including:
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Why you should care about operational risk
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Who is qualified to perform an operational risk review
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How you can easily create an initial operational profile
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The gray areas of operational due diligence
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Ten tips when performing an operational due diligence review
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Techniques for modeling operational risk
Packed with insight and tips to help you diagnose and monitor key hedge fund operational risks, Hedge Fund Operational Due Diligence: Understanding the Risks is required reading for every hedge fund analyst and investor.
About the Author
JASON A. SCHARFMAN is a Director with Graystone Research at Morgan Stanley. His responsibilities include analyzing and reporting on the operational risks of alternative investments such as hedge funds, funds of hedge funds, and private equity considered for investment. He also makes recommendations to the firm’s investment committee based on that analysis. He has written on the subject of operational due diligence and travels and speaks worldwide on hedge fund operational risks.
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