# Hedge Fund Operational Due Diligence From the Manager's Side
What an allocator's operational due diligence team checks at a hedge fund manager, the evidence and owner behind each area, how the review runs, and how to keep DDQ answers, policies, and practice in agreement.
Hedge fund operational due diligence (ODD) is the review an institutional allocator runs on a hedge fund manager's non-investment operations (governance, compliance, trade processing, valuation, cash controls, service providers, and technology) before it invests and at intervals afterward. ODD runs beside the investment team's review of the strategy, and it tests the manager's due diligence questionnaire (DDQ) answers against documents, interviews, an on-site or virtual visit, and confirmations from the fund's administrator, auditor, and prime broker. For the manager, getting through it comes down to having evidence and a named owner ready for every area, and making sure the DDQ answers, the written policies, and what the analyst sees on site agree for every allocator.
ODD usually starts once the manager is on an investment shortlist, after [the RFP stage of an institutional manager search](/blog/asset-management-rfp). The questionnaire at its center is a DDQ, so the work overlaps with [how managers build a complete DDQ response](/blog/ddq-response). The allocators running the review include pension funds, endowments, funds of funds, and family offices.
This guide maps each review area to its evidence and its owner, then walks through how the review runs and where the AIMA DDQ fits. The second half covers keeping answers consistent across allocators, the flags analysts raise most often, and how to prepare.
## What Does an Operational Due Diligence Review of a Hedge Fund Check?
An operational due diligence review checks every part of a hedge fund manager's business that protects investor assets and produces an accurate net asset value (NAV), and for each area the analyst wants a document that proves the answer and a person at the firm who owns it.
Allocators run the review because funds can fail for operational reasons as well as investment ones, such as positions marked without independent challenge or cash moved without a second approval. A strong track record does not offset a weak control, so an ODD team can stop an allocation that the investment team supports.
The table groups the review into eight areas. The owners named are the usual ones: the chief operating officer (COO), chief financial officer (CFO), chief compliance officer (CCO), general counsel, and the heads of operations and technology.
| Area | Evidence the analyst asks for | Owner at the manager |
| -------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- |
| Governance and legal structure | Entity and ownership chart, offering memorandum and fund governing documents, board and committee terms and minutes | COO, general counsel |
| Key personnel | Biographies, org chart, key-person and succession provisions, consent for background checks | COO, with the founders or chief investment officer (CIO) for key-person terms |
| Compliance and regulatory | Compliance manual, code of ethics, personal trading and gifts records, registrations and regulatory filings (for example, Form ADV for an adviser registered with the US Securities and Exchange Commission), compliance testing, breach and complaints log | CCO |
| Trade lifecycle and operations | Trade flow description, reconciliations with the administrator and prime broker, trade error policy and log | Head of operations or COO |
| Valuation | Valuation policy, pricing sources, override and price challenge log, valuation committee minutes, the administrator's NAV process | CFO and the valuation committee |
| Cash controls | Cash movement procedure, authorized signatory lists and bank mandates, payment approval records | CFO or controller |
| Service providers | Agreements with the administrator, auditor, prime broker, custodian, and counsel; provider review records; provider control reports (such as a SOC 1 report) where they exist | COO |
| Technology, cybersecurity, and business continuity | Information security policy, access reviews, penetration test summary, business continuity plan and test results, incident log | Head of IT or chief technology officer (often with an outsourced IT provider), COO for continuity |
At a smaller manager, one person often holds several of these roles and some functions are outsourced, yet the analyst still wants the accountable person named for each area. Investor relations, or whoever owns the DDQ, coordinates the answers, and each area's owner signs off the answers for that area.
Every DDQ answer should point to the document that backs it, so it pays to [structure each answer around the evidence that proves it](/blog/anatomy-of-a-ddq-answer). The sections below cover what the analyst tests in each area and where the DDQ, the written policy, and what the analyst sees on site most often drift apart.
### Governance and Legal Structure
The governance review tests whether the oversight described in the offering documents actually happens. The analyst reads the fund structure, who controls the management company, and what the board and any committees can decide, then checks the minutes against those terms.
Drift shows up when the DDQ describes a risk or valuation committee with a clear mandate and the minutes show it rarely met, or only approved what was put in front of it. A fund board that signs whatever the manager sends reads as a weak check. Wherever a committee appears in the DDQ, its minutes should show it doing the work the answer says it does.
### Key Personnel
The personnel review tests whether the firm depends on people its documents do not account for. The analyst confirms who holds each critical role, what happens if a founder or the CIO leaves, and whether background checks match the biographies.
The drift is usually in the org chart. The DDQ lists headcount and reporting lines from the last time anyone updated it, while the chart handed over at the visit already reflects new hires and departures. An analyst who meets a head of operations the DDQ never mentions will start asking what else is out of date.
### Compliance and Regulatory
The compliance review tests whether the compliance program runs the way the manual says it does. The analyst samples records to see whether each control leaves a trail: pre-clearance of personal trades, gifts and entertainment logs, testing results, and the handling of past breaches.
A familiar gap is a policy that requires pre-clearance next to a sample of personal trades with no approval on file. Regulatory history gets checked through public filings as well as the DDQ, so the answers about exams, deficiencies, and enforcement have to match what the analyst can find without asking.
### Trade Lifecycle and Operations
The operations review follows a trade from order to settlement and looks for the places an error could slip through. The analyst wants to know who books the trade, who reconciles positions and cash with the administrator and the prime broker, and who signs off on breaks.
The typical mismatch: the DDQ describes automated daily reconciliations, and the walk-through shows a spreadsheet step one person runs by hand. Trade errors get tested too, and an error log that stays empty for a long stretch raises the question of whether errors are being recorded at all.
### Valuation
The valuation review tests whether the manager can mark its own book without independent challenge. The analyst traces where prices come from, who can override them, and how the administrator's NAV process checks the manager's marks, with the closest attention on hard-to-value positions.
Drift appears when overrides bypass the policy's approval route. The policy requires valuation committee sign-off, and the override log shows a portfolio manager approving changes to positions in their own book. A valuation committee that never disagrees with the front office draws questions even when the prices themselves were right.
### Cash Controls
The cash review tests whether any one person can move investor money. The analyst reads the procedure for payments and transfers, then compares the authorized signatory lists and bank mandates with a demonstration of a real payment.
The usual gap: the DDQ says every payment needs two signatories, and the bank mandate or the demo shows a single approver for some payment types. Changes to standing payee details get the same scrutiny, because a redirected payment instruction is a known fraud risk.
### Service Providers
The service provider review tests whether independent firms stand between the manager and the investors' assets. The analyst checks who the administrator, auditor, prime broker, custodian, and counsel are, how the manager oversees each one, and whether any of them is related to the manager.
Drift here is often a dating problem. The DDQ still names an administrator or auditor the fund has replaced, or the provider control report on file has lapsed. Because the analyst will contact providers directly, every provider the DDQ names has to be the current one and should expect the call.
### Technology, Cybersecurity, and Business Continuity
The technology review tests whether the firm can protect its data and keep operating through an outage. The analyst asks who can access which systems, when access was last reviewed, how incidents are handled, and when the continuity plan was last tested. Where IT is outsourced, the analyst also wants to see how the firm oversees that provider.
The common gap is a date. The DDQ gives one date for the last continuity test and the test report gives another, or the penetration test summary predates a move to new systems.
## How the Review Runs, From Questionnaire to Monitoring
A hedge fund ODD review starts once the allocator's investment team, or [the investment consultant running the search](/blog/investment-consultant-rfp), puts the manager on the shortlist. From there it moves from paperwork to people to the fund's service providers, and it ends in a rating the allocator keeps under review for as long as it stays invested.
The paperwork comes first: the AIMA DDQ or the allocator's own ODD questionnaire, plus a document request. The analyst reads the policies, offering documents, audited financial statements, and provider agreements against the answers, and arrives at the visit with questions about every place they disagree.
The visit, on site or by video, is where the review tests people and processes. Expect interviews with the COO, CFO, and CCO, walk-throughs of the trade and cash processes, and live system demos. Analysts often ask to watch a process run, such as a reconciliation or a payment approval, so the people who do the work should be in the room alongside the people who own it.
Service provider confirmations follow or run in parallel. The administrator, auditor, and prime broker confirm their role directly to the allocator, which lets the analyst compare the manager's account of each relationship with the provider's own.
The first review closes with findings and a rating. Depending on the allocator, the outcome is an approval, an approval with conditions, or a decline, often with remediation items attached. Monitoring then continues through update requests, re-reviews, and checks after any material change.
How long all of this takes depends on the allocator's process and on how quickly the manager supplies documents. A first review takes longer than a re-review, because a re-review starts from what the analyst already knows about the firm.
## Where the AIMA DDQ Fits in Hedge Fund Operational Due Diligence
The AIMA DDQ, the due diligence questionnaire the Alternative Investment Management Association publishes for hedge funds, is the usual starting paperwork of an ODD review, and the rest of the review tests what the manager wrote in it.
AIMA's own [due diligence questionnaires page](https://www.aima.org/sound-practices/due-diligence-questionnaires.html), as it read in November 2026, calls the DDQ "an early step in the due diligence process" and says investors use the answers to decide where to probe and to test against what they learn elsewhere. The analyst reads the manager's AIMA DDQ before the visit and tests it during the visit. An allocator may add its own ODD questionnaire or supplementary questions on top, so the same answer often has to appear in several formats.
For what the document asks and how to answer it, see the guide to [the standard hedge fund DDQ](/blog/aima-ddq). AIMA has also published [DDQs for digital asset managers and funds](https://www.aima.org/article/press-release-aima-publishes-due-diligence-questionnaire-for-digital-asset-funds.html), built to assess the investment and operational risks particular to that asset class, custody included.
In private markets, [the ILPA DDQ that private equity managers complete](/blog/ilpa-ddq) plays the same role. ILPA's [due diligence questionnaire page](https://ilpa.org/resources-tools/resource-library/due-diligence-questionnaire/) listed DDQ 2.0 as the current version in November 2026. The review areas are similar, while the evidence shifts toward portfolio company oversight and capital calls in place of daily trading and cash flows.
## Keeping DDQ Answers, Policies, and On-Site Evidence in Line
Consistency comes from answering every allocator from one approved, dated, and sourced answer set, and checking that set against the written policies before each review.
An inconsistency is a finding in itself. The analyst reads the DDQ, the policy, and the practice side by side, and a gap between them reads either as a weak control or as an answer written for its audience. A DDQ answer is also a written representation to an investor, so a mismatch is a compliance question as well as an operational one.
Drift usually starts in one of these places:
- An answer copied forward from last year's DDQ without a check against the current policy.
- A policy updated without updating the DDQ answers that describe it.
- A fund-level answer reused for a different fund, or one strategy's wording dropped into a firm-level ODD questionnaire.
- Wording adjusted for one allocator and never reconciled with the master answer.
- A yes or no box that disagrees with the written answer beside it.
- A change of person or provider that reaches the org chart before it reaches the DDQ.
The practice that prevents drift is a handful of habits. Give every answer one owner and a review date, and attach the source document to every answer. Keep firm-wide answers apart from fund-level ones.
After each visit or finding, update the answer set first, then answer the next questionnaire from it. Check [responsible investment answers in an ESG DDQ](/blog/esg-ddq) against the policy and the fundraising materials as well, because that wording drifts in the same ways.
AutoRFP.ai drafts each allocator's DDQ and ODD questionnaire answers only from content your team has approved, with the source shown beside every answer, so the valuation answer one allocator receives matches the valuation policy the next allocator's analyst reads on site. When no approved content supports a question, AutoRFP.ai flags it for a person on your team to answer from the firm's own records.
In [AutoRFP.ai's DDQ response workflow](/ddq-response-software), a person approves every answer before it goes out. The allocator's own Excel or Word questionnaire is imported as sent, and the approved answers are written back into that same file. Each approved answer is saved for reuse, with fund-level and firm-wide approvals kept apart, so the next allocator receives the same current answer. The visit, the interviews, and the provider confirmations stay with the firm's people, and AutoRFP.ai covers the written answers.
Teams choosing software for this work can see [how response tools for asset managers compare](/blog/best-rfp-software-for-asset-managers).
## What Do ODD Analysts Flag Most Often?
The flags an ODD analyst raises fall into four groups: answers that disagree with the policy or the practice, controls that rest on one person, limits on what the analyst can see, and earlier findings left open. These are the specific flags that come up most, with what the manager does about each:
- **Policy and practice disagree.** The written policy says one thing and the walk-through shows another. Fix the practice or the policy first, then the answer.
- **Answers change with no stated reason.** An answer differs between allocators, or between this year and last, and nobody can explain why. Keep a record of what changed and why.
- **Restricted access.** The manager declines a visit, a provider contact, or a document request. Agree access terms before the review starts.
- **Single points of control.** One person can move cash or override a price, or the firm leans on a key person with no succession plan. Show how duties are segregated and how succession would work.
- **Valuation without independent review.** Overrides happen outside the policy's approval route, or the manager sets prices that nobody independent checks. Route every override through the policy and show the independent check.
- **Providers without independence.** A related-party administrator or self-administration leaves no independent view of the books. Explain the oversight that replaces independence, or change the arrangement.
- **Earlier findings left open.** A remediation item from the last review is still open. Close it, or show a dated plan to close it.
## How Should a Hedge Fund Manager Prepare for an ODD Review?
Preparing for a hedge fund ODD review means running the review on the firm first: assemble the evidence the analyst will ask for, brief every owner on the answers the firm gave, and check that the DDQ matches the policies and the practice before the allocator does.
The simplest version is a mock review led by the COO or CCO, or by an outside adviser, using the questions from the last allocator's ODD questionnaire. AIMA makes a similar point about its standard questions, noting on [its DDQ page](https://www.aima.org/sound-practices/due-diligence-questionnaires.html) that new managers can use them to measure their practices against industry norms before any investor asks.
Build the document pack by review area (governance, personnel, compliance, operations, valuation, cash, service providers, and technology), so a request about one area can be answered from one folder with current, dated files. Brief each owner with the exact answers already sent to allocators, because the analyst compares what each owner says in the interview with what the DDQ says. The goal of the mock review is a firm that passes the checks below whenever an allocator asks.
Emerging managers raising institutional money for the first time have the most to document, because more of their functions are outsourced. For compliance, IT, and administration, the analyst wants to see how the firm oversees each provider: who reviews the provider's work, how often, and what happens when something goes wrong. A written oversight record for each outsourced function answers those questions before the analyst asks them.
After the review, update the answer set with anything the firm promised the analyst, from a policy change to a new control, so the next questionnaire starts from the improved version. The practical next step is to [keep one approved, sourced DDQ answer set](/ddq-response-software) that every allocator's questionnaire draws from.