PR OFILE


for internal use, while an ODD Manager Report can be shared with parties approved by the manager and is the same scope, look and feel as a report commissioned by an allocator; managers are only permitted to check facts for accuracy.


Any ODD Manager Therapy carried out prior to an ODD Manager Report for an allocator would be disclosed.


“In one instance, an allocator requested that the manager had ODD Manager Therapy prior to their commissioned ODD Manager Report. This helped since we already had the documents and knew a lot about them, operationally, though it is fairly unusual,” says Thom.


Service provider reviews Service provider reviews are more extensive than the service provider coverage in a manager report.


“A full scope 40-to-50-page ODD report on the investment manager and its investment vehicles would typically check that service providers are engaged for the stated functions and carry out other checks. For example, we would verify assets and valuation independence through administrator transparency reports, and whether the fund administrator controls cash by independently authorising withdrawals,” says Newman. perfORM also assess whether and how managers are carrying out their own ODD on service providers. Exceptions where service providers require more investigation or comment in a manager report could include small or unknown service providers or those subject to adverse media reports.


A full scope service provider review is comparable in length to a manager review, and where it has identified any shortfalls, that knowledge could sometimes also feed into a manager or fund ODD report, where permitted by the terms and any non- disclosure agreement with the service provider or other party who commissioned the service provider report.


Service provider reviews can be commissioned by the service provider itself, or by asset managers, allocators, or other entities, such as sports teams to vet potential sponsors in the nascent and evolving space of virtual asset service providers.


Crypto manager reviews perfORM have adapted their approach to the new asset classes of digital currencies and decentralised finance, and are members of crypto UK and Global DCA. perfORM have reviewed some well-known


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crypto managers in centralised and decentralised finance, including those trading liquid long/short, market neutral and statistical arbitrage crypto strategies (including some that The Hedge Fund Journal is familiar with), as well as funds of funds in this space. perfORM recently commenced a special project reviewing 15 venture capital managers investing in less liquid areas such as Web3, blockchain and NFTs.


Reviews of virtual asset service providers (VASPs) – and some other crypto-related service providers outside the VASP definition – have included exchanges, brokers, lenders and custodians.


Exchange failures Two clients commissioned work on FTX, and perfORM flagged up a number of concerns around opacity, conflicts with affiliates, risk management and key staff turnover.


“A mutual NDA was never completed, and no confidential information was ever provided as a result. An exchange running both an affiliate investment hedge fund type entity and an exchange could present, if not carefully managed and controlled, a conflict of interest, and be open to abuse,” says Thom.


We observed that enabling 101 times leveraged tokens, for some customers, reflected poorly on FTX’s own risk management policy and was way above many other exchanges. We also noticed turnover at senior level, with the head of institutional sales, typically a first contact for helping to coordinate ODD reviews, seemingly leaving abruptly in October 2022. Also, the hedge fund CEO resigning in August and the exchange US CEO in September,” he adds.


Consequently, neither of perfORM’s clients used the exchange, which recently failed. perfORM’s November and December ‘Due Diligence Matters’ e-bulletins and a December 2022 Crypto UK webinar include further discussion.


The exchange research was initially shared with the clients who commissioned the work and perfORM would not have entertained general client alerts or wider publication of the findings, prior to the entity’s failure. Thom argues that the media plays an important role in publicly disseminating risk factors and potential conflicts of interest around all sorts of asset managers and service providers.


There have been multiple failures, and a few “scams” in the crypto world involving coin


offerings, funds, brokers and lenders, but perfORM would caution against extrapolating too much from any one incident to others in future.


“A thorough post-mortem of the exchange failure is now underway, and rightly so; lessons must be learned. However, the next ‘blow-up’ is always different from the last and we would always recommend a disciplined ODD approach to ensure our clients do not need to rely on the benefit of hindsight,” says Newman.


Exchange hacks Hacks of crypto exchanges seem to be a perennial occurrence, which perfORM do monitor, offering a different perspective to some media reports.


“Even if clients of the exchange are made whole and suffer no financial loss there are still reputational risks. Our ODD focuses more on the risk of internal hacks, which have in at least one case in Canada led to permanent losses for clients,” says Thom.


Some custody models, including offline “cold storage wallets” are designed to mitigate or avoid hacking risks for certain investment strategies but will not work for others. The nuances around crypto custody, self-custody, asset segregation and reserve audits are being hotly debated, and are beyond the scope of this article, but have been touched on in perfORM blogs, monthly newsletters and webinars.


Spotting ineffective controls and potential for fraud perfORM’s founders have identified “red flags” in various organisations that subsequently were made public, although anticipating wrong-doing, fraud investigation and forensic accounting is not their mandate.


During the normal course of an ODD meeting, perfORM might flag up certain relevant weaknesses in internal controls or other matters and propose mitigants to the manager and the client, who may then request remedial action to be implemented.


“Our skill and experience enables perfORM to evaluate whether conditions, environment or framework do not meet expectations in relation to institutional standards,” points out Newman.


perfORM nonetheless do take a risk-based approach to evaluate the potential for fraud.


“We cannot look at rationale or motivation but can identify opportunity for fraud such as weaknesses


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