I recently attended a symposium hosted by the Chicago office of a law firm with a substantial investment management practice. Topics discussed were broad but focused primarily on operations, with several interesting points. In general, the duration of time to complete operational due diligence on a manager has increased substantially.

Back office responsibilities have expanded to include portfolio stress testing and risk management. Value at Risk under different scenarios such as oil price shocks, the sub-prime defaults, inflationary periods and the Greek credit crisis are typical. Further, the time period to completely liquidate the portfolio under the aforementioned scenarios should be addressed.

Managers that run a co-mingled fund along with managed accounts are facing additional scrutiny. Should the owner of the managed account force a complete liquidation, the manager needs to demonstrate how asset prices in the co-mingled fund are potentially affected.

A comprehensive disaster recovery and business continuity plan must be in place with evidence of robust testing, even for advisors that are not registered with the Securities and Exchange Commission. Also, compliance manuals and a code of ethics are frequently being requested from non-registered advisors.

A usual query by a potential investor is how the portfolio or business would be affected should the CIO or a key analyst be "hit by a bus." This question is now being posed in the instance of the CFO’s or COO’s unexpected demise. Be prepared to define the responsibilities of all back office\operational personnel, and the adverse affect on the organization should any operations personnel become suddenly inactive.

Sincerely,

Kurt Koeplin, Chief Financial Officer, Rail-Splitter Capital Management, LLC

Member of the HFBOA Board of Directors