Operational Due Diligence

When a family allocates to an external manager, two separate questions arise: Is the strategy sound? And is the organization behind it trustworthy and well-run? ODD answers the second question. It examines who holds the assets (the custodian), how positions are independently priced, whether there are adequate controls against fraud or operational error, and what happens if a key person leaves. Families commonly conduct ODD alongside investment-strategy due diligence before making an allocation.

Consider a family office evaluating a hedge fund. The investment team may love the strategy, but ODD might reveal that the fund uses an affiliated administrator that also values the positions — a conflict of interest that independent third-party oversight would normally prevent. Discovering that before wiring money is precisely the point. Without ODD, a family may be exposed to risks that have nothing to do with markets.

ODD is sometimes treated as optional or bureaucratic, especially when a manager comes highly recommended. Families that have experienced fraud or operational failures generally disagree. The manager selection process at experienced family offices typically treats satisfactory ODD as a hard requirement, not a courtesy review. Legal counsel and specialized ODD consultants can assist families in structuring a thorough process.