The funds market continues to see an increasing demand for transparency. Investors consider investment and due diligence processes essential factors in their business activities. Fund transparency reports are produced to address this concern. These reports consist of information obtained through rigorous assessment and verification of significant components of investment funds.  

In this article, we will provide an overview of fund transparency reports and investment and operational due diligence. 

The demand for transparency

A handful of significant events have prompted the demand for transparency in the investment sector.  

A classic example is the financial crisis of 2008, which was partly caused by regulatory failures in the market. As a result, many investors suffered significant losses and were exposed to risks during the crisis and the recession that followed. The famed Bernie Madoff Scandal also aggravated investor concerns, as numerous investors lost millions of dollars with their investments. Higher operating and investing standards were imposed, and reforms were devised to lessen the possibility of such instances occurring.  

How can a fund transparency report address this

A fund transparency report contains valuable information regarding a fund’s profile, where the risks, pricing and processes are laid out. It provides an independent assessment of an investment fund and addresses potential concerns regarding a portfolio.  

The Standards Board for Alternative Investments (SBAI) outlined the general contents of a fund transparency report as the following: 

• Fund net asset value (NAV), together with assets and liabilities confirmation 
• Verification of pricing sources 
• Counterparty exposure and asset custody 
• Classification of assets  

However, there is no singular format for a fund transparency report. The information available to the fund administrator and the degree of openness of an investment manager will determine how detailed the report will be.  

Ultimately, a fund transparency report facilitates due diligence. The abovementioned information supplements the materials necessary in a fund’s due diligence systems and assists investors in monitoring their investment portfolios. 

What is due diligence?

A fund transparency report aids in the attainment of both investment and operational due diligence.  

Investment due diligence pertains to the thorough assessment and verification of investment information. The information obtained from the process of investment due diligence will eventually determine whether an investor will fund a portfolio. Meanwhile, operational due diligence involves processes that enable investors to fully understand an investment’s intricacies and overall structure.  

Ideally, operational due diligence also allows investors to assess a fund’s non-investment activities and segments. Some examples of such activities are: 

• Human resource assessment 
• Information technology security and infrastructure 
• Contingency and disaster recovery approach   
• Legal and compliance strategies 

These non-investment activities are also a point of interest for investors because they take into account other significant attributes that could affect a fund’s performance and contribute to any additional operational risks. Some of these potential risks are legal, reputational and information technology risks. 

On the other hand, the type of due diligence processes undertaken by fund managers is also a point of consideration for investors. In a survey conducted by the Chartered Alternative Investment Analyst (CAIA) Association involving 111 asset managers and 233 institutional investors, it was found that the majority of the respondents regard both quantitative and qualitative due diligence processes. This means that reports that solely contain quantitative information (i.e., returns and figures) are insufficient for investors who would want to assess a portfolio. Thus, qualitative due diligence is also important for investors and asset managers. 

Overall, fund transparency reports and due diligence processes improve a fund’s integrity – an attribute that is highly sought out by investors.

Dealing with change

The pandemic-driven adjustments within the assessment processes of investment and operations affected how investors and managers manage their funds. Due diligence assessments followed suit as in-person reviews shifted to virtual settings.  

This presented some challenges to the due diligence process of fund investors and managers. For instance, aspects such as human resource and information technology policies and structures may require more efforts to effectively evaluate in this operational setup.

How can Bolder Group help

Investors look to professional service providers to ensure fund transparency and due diligence. Bolder Group’s fund services include presenting its clients with timely and relevant data so they can effectively manage and mitigate associated risks. 

Contact your nearest Bolder office for our funds and reporting services. 

Bolder Group does not provide financial, tax or legal advice and the information contained herein is meant for general information purposes only. We strongly recommend that before acting on any of the information contained herein, readers should consult with their professional advisers. The Bolder Group accepts no liability for any errors or omissions in the information, or the consequences resulting from any action taken by a reader based on the information provided herein.

Bolder Group refers to the global network of independent subsidiaries of Bolder Group Holding BV. Bolder Group Holding BV provides no client services. Such services are provided solely by the independent companies within the Bolder Group which are each legally distinct and separate entities and have no authority (actual, apparent, implied or otherwise) to obligate or bind Bolder Group Holding BV in any manner whatsoever. The operations of the Bolder Group are conducted independently and have no affiliation with third party financial, tax or legal advisory firms or corporations.