Post Summary
The study surveyed institutional investors representing over $700 billion in assets under management allocated to external hedge fund and private equity managers. Participants included fund of funds managers, public and private pension plans, endowments, and outsourced chief investment officer organizations, with 57% reporting allocations to more than 50 external managers.
Almost 40% of survey participants reported not having written operations due diligence policies, whether as a standalone document or as part of their broader investment policy, despite operations-related risk being a significant consideration alongside performance and portfolio risk.
No. A significant majority, 83%, of survey respondents reported having only zero to three staff resources dedicated to ODD activities, a gap that persists even among the largest institutional investors, and only 23% report outsourcing select ODD activities to supplement internal resources.
Fund administrators, auditors, and custodians are the top three vendor relationships institutional investors focus on, with 89% of survey participants citing fund administrators specifically in their top three and completing formal verification processes, relying heavily on SSAE No. 16 reports and vendor discussions.
About 53% of respondents incorporate a formal manager scoring process into initial ODD evaluation, and a similar percentage incorporate peer-level benchmarking, though much of that benchmarking relies on anecdotal comparisons rather than systematic, data-driven peer analysis.
Is Your ODD Process Adequate to Satisfy Your Institution's Risk Tolerance and Fiduciary Responsibilities
Convergence Inc. has released a full survey report to institutional investors based on its recently completed Operations Due Diligence (ODD) Effectiveness Study. The study included institutional investor participants responsible for over $700 billion of assets under management and allocated to external managers, including allocations to both hedge fund and private equity managers. 57% of participants reported having allocations to over 50 external managers. Survey participants included a cross section of fund of funds managers, public and private pension plans, endowments and outsourced chief investment officer organizations.
Survey findings suggest that a significant number of institutional investors rely upon periodic manager communication and loosely defined processes to stay abreast of material events at advisors with investment allocations. Convergence data indicates that managers of private funds file updated regulatory filings approximately 3 times per year on average for material events impacting their business and product profile. Institutional investors may have limited resources available to pro-actively fulfill their fiduciary responsibilities in an environment of increasing regulatory scrutiny and increasing operations-related complexity.
Selected highlights and results of the study include the following:
1. Many institutional investors do not have written policies with respect to operations due diligence (ODD).
Almost 40% of institutional investors who participated in the ODD survey report NOT having written ODD policies, including as part of their overall investment policies. Beyond performance and portfolio risk, operations-related risk and controls around managing regulatory risk should be significant considerations for allocators, and warrant a documented approach to reviewing such matters.
2. Dedicated investor resources to ODD activities are not adequate to address the post-investment monitoring of operations-related risk.
A significant majority (83%) of institutional investor respondents to the survey report only having 0-3 staff resources dedicated to ODD activities. In many follow on conversations with these survey participants, even the largest institutional investors have limited dedicated resources. In certain instances, internal staff resources may be augmented with external ODD service providers and/or technology tools. However, just 23% of institutional investors report outsourcing select ODD activities.
3. Service provider assessment and ongoing monitoring by institutional investors is not sufficient given the critical nature of those relationships to the control and operations-related environment of managers.
The top 3 vendor relationships of institutional investor focus include fund administrators, auditors and custodians. A full 89% of ODD survey participants cited fund administrators in their top 3, and complete a formal verification process to ascertain that vendor relationship. Institutional investors place significant reliance on SSAE No. 16 Reports and on vendor discussions to assess the quality and fit of the vendor relative to the needs to the manager. A full 55% of institutional investors cite a change in vendors as a material event or "red flag" in conjunction with their ongoing ODD processes.
4. Institutional investors should develop and incorporate a formal manager "scoring" process, including consideration of data-driven "peer" level benchmarking, into their ODD processes.
Approximately 53% of institutional investor respondents to the survey report they incorporate a manager "scoring" process into their initial ODD evaluation. This can be in the form of a "high, medium, low", or 1-10 scoring scale rating with respect to matters of operational infrastructure and risk, following completion of initial ODD. About the same percentage of respondents report they incorporate peer level benchmarking into their ODD evaluation process. Much of this "benchmarking" is based on anecdotal data references, comparisons to other managers across the investor's existing allocations and based on industry intelligence.
5. Given manager expansion into new product and distribution channels and a dynamic regulatory environment, institutional investor processes for ongoing ODD need to be re-examined.
Following initial ODD and the on-boarding of a manager, the intervals and practices for follow on, or "ongoing ODD" varies significantly, particularly based on allocation fund type (hedge funds v private equity). About 63% of institutional investor respondents to the survey report performing ongoing manager reviews (absent an interim "material event") within a 24 month interval for hedge fund allocations, while just 24% report doing so for PE allocations. The top 4 practices in place by investors as part of their ongoing ODD include 1. Review of audited financials; 2. Monitoring industry news; 3. Review of ADV filings for changes; and 4. Review of fund administrator transparency reports. Only 21% of investors in the survey report using technology-based tools in their ongoing ODD processes.
The Appendix below and attachments include the results of two select questions from the Convergence ODD study pertaining to the professional expertise of dedicated ODD staff and the primary areas of focus in investor ODD practices.
Partnering with Convergence
Convergence focuses on providing Pension – Endowments and Foundations with the information they need to identify and manage risks that are changing in their Advisor's business – INDEPENDENT of the Advisor.
Convergence enables its institutional investor clients to increase internal efficiencies, reduce third party consulting costs, and enhance ODD responsibilities through the use of customized technology tools which "push" material events communications to those responsible for ongoing ODD.
Institutional investors have a fiduciary obligation to protect the assets entrusted to them by their stakeholders, and overseeing and monitoring material changes specific to their allocations and within the industry is a must. While the level of focus and resources allocated to ongoing ODD is increasing, current processes are generally (1) reactive in nature, (2) dependent upon requesting information or on periodic updates, and (3) are likely not all encompassing, even with respect to specific fund allocations.
Convergence has identified 33 operating complexity factors which it captures and creates, all geared at enabling investors the ability to assess and measure the business risk profile of manager allocations, including the ability to compare and contrast with industry peers.
The Convergence platform captures and creates data on a daily basis covering the entire registered investment advisor universe. Custom data updates are pushed to institutional investors based on their customized requirements, including specific fund allocations and specific data artifacts based on their own assessment of operations-related risk.
About Convergence, Inc.
Convergence has created an entirely new platform comprising (1) enriched and customized data; (2) research and analytical products; (3) surveillance/ monitoring services; and (4) advisory services, all providing transparency into the infrastructure of the alternative asset management industry.
Please contact George Evans at or Joe Dello Russo at to learn more about the results of the Convergence ODD study and the Convergence platform and related technology tools available to institutional investors.
Appendix
The attached tables are extracts from the final Convergence ODD study report issued to institutional investor survey participants, which will be of interest to those with dedicated ODD staff and those allocating resources to ODD.
Introduction
ODD resources are clearly dominated by those with professional backgrounds in (1) accounting and finance, and (2) investment operations. These areas of expertise are consistent with the results below with respect to the allocation of time spent by investors in their ODD activities. However, given the very high focus on "compliance" activities, one could expect a trend of more compliance and legal resources being deployed in conjunction with investor ODD.
TABLE I. ODD Survey Question – What are the Primary Areas of Expertise of your Dedicated ODD Employees (select all that apply)?
Findings – The vast majority of ODD staff at institutional investors is comprised of accounting and finance, and investment operations professionals, as noted below. These skill sets suggest a critical need for focus on internal controls and operations-related processes. In addition, these areas of focus suggest a very "data driven" approach to ODD.
TABLE II. ODD Survey Question – Which Areas of Focus does your Firm Allocate the Highest % of ODD Time (select the top 5 areas)?
Findings – Virtually all institutional investor survey participants cite valuation as a "top 5" area of focus. Beyond valuation, the primary areas of focus revolve around regulatory compliance, the quality of staff and internal processes, and the quality of external service providers critical to the internal control processes of the manager. The Convergence platform enables investors to assess the complete business and operations-related profile of its manager allocations to manager peers.
Key Points
What was the scope and composition of Convergence's ODD Effectiveness Study?
- The study surveyed a substantial base of institutional capital: Participants collectively represented more than $700 billion in assets under management allocated to external managers, spanning both hedge fund and private equity allocations.
- Participant concentration in external managers was high: 57% of survey participants reported having allocations to more than 50 external managers, indicating a participant base with meaningful scale and diversification across manager relationships.
- The participant mix covered a cross section of institutional allocator types: Fund of funds managers, public and private pension plans, endowments, and outsourced chief investment officer organizations were all represented in the survey.
- Regulatory filing frequency provided important context for the findings: Convergence data cited in the study indicates managers of private funds file updated regulatory filings approximately three times per year on average for material events, underscoring how much change occurs between formal review cycles.
- The study frames a resource gap against a growing responsibility: The report positions its findings against an environment of increasing regulatory scrutiny and increasing operations-related complexity, arguing that investor resources have not kept pace with that complexity.
What did the study find about written ODD policies among institutional investors?
- Nearly 40% of survey participants lack written ODD policies: This gap exists whether as a standalone ODD policy or as a component of a broader investment policy, meaning a significant share of institutional investors are conducting ODD without a documented, repeatable framework.
- The gap extends beyond performance and portfolio risk oversight: The study frames written ODD policy as distinct from, and equally important to, the performance and portfolio risk considerations that typically receive more formal documentation.
- Operations-related risk and regulatory risk controls are identified as significant considerations: The report specifically calls out operations-related risk and the management of regulatory risk as areas warranting a documented approach, not just informal practice.
- The absence of written policy has implications for consistency: Without a documented framework, ODD practice at a given institution may vary by reviewer, by manager relationship, or over time, rather than following a consistent standard.
- This finding sets up the report's broader argument for formalization: The written-policy gap is presented as the first in a series of findings pointing toward the same conclusion, that ODD practice at many institutions remains less structured than the fiduciary stakes involved would suggest.
What did the study find about staffing and resource allocation for ODD?
- A significant majority of investors report minimal dedicated ODD staff: 83% of survey respondents reported having only zero to three staff resources dedicated to ODD activities, a strikingly thin resource base given the scale of assets under management represented in the survey.
- The resource constraint persists even among the largest institutional investors: The report notes that in follow-on conversations with survey participants, even the largest institutions reported limited dedicated resources, suggesting the gap is structural rather than tied to institution size alone.
- Outsourcing remains the exception rather than the norm: Only 23% of institutional investors report outsourcing select ODD activities to external service providers or technology tools, meaning the majority of the resource gap goes unaddressed by external augmentation.
- The gap raises questions about post-investment monitoring capacity: The study specifically frames this finding around whether dedicated resources are adequate to address post-investment monitoring of operations-related risk, not just initial due diligence at the time of allocation.
- This finding connects directly to the technology adoption gap identified later in the study: With minimal dedicated staff and low outsourcing rates, the study's later finding that only 21% of investors use technology-based tools in ongoing ODD becomes a more pressing concern rather than an isolated statistic.
What did the study find about how institutional investors assess and monitor key service providers?
- Fund administrators, auditors, and custodians are the top three vendor relationships of investor focus: These three service provider categories were identified as the primary vendor relationships institutional investors prioritize in their ODD process.
- Fund administrator verification is the most consistently applied practice: 89% of survey participants cited fund administrators in their top three vendor relationships and reported completing a formal verification process specifically for that relationship.
- SSAE No. 16 reports and vendor discussions are the primary tools of assessment: Institutional investors place significant reliance on SSAE No. 16 reports and direct vendor discussions to evaluate the quality and fit of a service provider relative to a manager's needs.
- Vendor changes are treated as a material event by a majority of investors: 55% of institutional investors cite a change in service provider as a material event or red flag warranting attention within their ongoing ODD process.
- The reliance on periodic reports raises a timing question: SSAE No. 16 reports and vendor discussions are inherently periodic rather than continuous, meaning the assessment reflects a point-in-time view rather than the ongoing signal that a change in vendor relationship might otherwise provide before formal notification.
What did the study find about formal scoring and peer benchmarking practices?
- Roughly half of institutional investors use a formal manager scoring process: 53% of survey respondents incorporate a scoring process, often structured as a high/medium/low or 1-10 scale, into their initial ODD evaluation of operational infrastructure and risk.
- A similar percentage incorporate peer-level benchmarking: About the same share of respondents report incorporating peer benchmarking into their ODD evaluation process as part of assessing a manager relative to its comparable set.
- Much of the current benchmarking relies on anecdotal comparison rather than systematic data: The study specifically notes that much of this benchmarking is based on anecdotal data references and comparisons to other managers across an investor's existing allocations, rather than a structured, data-driven peer analysis.
- The study frames formal scoring and benchmarking as a recommended practice, not just an observed one: The report explicitly states that institutional investors should develop and incorporate a formal manager scoring process, including data-driven peer benchmarking, into their ODD processes.
- This finding highlights a gap between practice and best practice: Roughly half of institutional investors already use some form of scoring or benchmarking, suggesting the concept is established, but the reliance on anecdotal rather than systematic data indicates room for a more rigorous, data-driven approach.
What did the study find about ongoing ODD practices after a manager is onboarded?
- Review intervals vary significantly by fund type: 63% of investors report performing ongoing manager reviews within a 24-month interval for hedge fund allocations, compared to just 24% for private equity allocations, absent an interim material event.
- Four practices dominate current ongoing ODD activity: The top practices identified are review of audited financials, monitoring of industry news, review of ADV filings for changes, and review of fund administrator transparency reports.
- Technology adoption in ongoing ODD remains low: Only 21% of investors report using technology-based tools in their ongoing ODD processes, meaning the large majority rely on manual review of the four practices identified above.
- The study characterizes current ongoing ODD as reactive rather than proactive: Current processes are described as generally reactive in nature, dependent on requesting information or periodic updates, and not fully comprehensive even with respect to specific fund allocations.
- Manager expansion into new products and channels adds urgency to this finding: The study connects the need to re-examine ongoing ODD processes specifically to managers expanding into new products and distribution channels within a dynamic regulatory environment, suggesting current practices may not be keeping pace with how managers themselves are evolving.