How do you assess the operational risk of a fund manager before investing?

3 Governance and oversight

The third step is to assess the fund manager's governance and oversight framework, and how it ensures accountability, transparency, and compliance. You want to check the fund's legal structure, terms, and conditions, and how they protect your rights and interests as an investor. You also want to verify the fund manager's compliance program, policies, and procedures, and how they address relevant laws, regulations, codes, and standards. You can inspect the fund's legal documents, compliance manuals, audit reports, and certifications, as well as interview the fund manager's compliance officer and external advisors, to evaluate this area.

4 Risk management and controls

The fourth step is to analyze the fund manager's risk management and controls system, and how it identifies, measures, monitors, and mitigates operational risks. You want to see how the fund manager defines its risk appetite, tolerance, and limits, and how it allocates its risk capital and resources. You also want to examine how the fund manager implements its risk policies, procedures, and tools, and how it reports and escalates its risk exposures and incidents. You can review the fund's risk reports, dashboards, and metrics, as well as test the fund manager's risk controls and contingency plans, to examine this area.

5 Infrastructure and technology

The fifth step is to inspect the fund manager's infrastructure and technology platform, and how it supports its operations and business continuity. You want to evaluate the fund manager's operational capabilities, capacity, and scalability, as well as the quality and reliability of its systems, data, and networks. You also want to assess the fund manager's cybersecurity program, policies, and practices, and how it protects its information and assets from cyber threats and attacks. You can audit the fund's IT systems, software, hardware, and backups, as well as conduct penetration tests and cyber simulations, to inspect this area.

6 Service providers and outsourcing

The final step is to review the fund manager's service providers and outsourcing arrangements, and how they affect its operational risk profile and performance. You want to know who the fund manager's key service providers are, such as custodians, administrators, auditors, brokers, and consultants, and what functions they perform for the fund. You also want to understand how the fund manager selects, monitors, and evaluates its service providers, and how it manages the risks and challenges of outsourcing. You can request the fund's service agreements, due diligence reports, and service level standards, as well as interview the fund manager's service providers, to review this area.