that are open to abuse that could avail a fraud without too much difficulty. One example would be inadequate controls over appropriation of cash where the CFO and portfolio managers have control over fund expenses without independent control. However, most managers with this weakness have not experienced fraud,” says Newman.


Though in previous incarnations the founders have vetoed funds, today perfORM does not view its role as being to pass or fail a subject, but rather to identify weaknesses to enable allocators to make informed decisions.


Unique strategies and subjective valuation Beyond crypto, perfORM have reviewed some more esoteric strategies in less liquid asset classes including real estate, private equity, litigation finance and music royalties resulting in sometimes contentious valuation questions, particularly in a year like 2022 where public market valuations have severely recalibrated to higher inflation and interest rates, not to mention the recession risks on the horizon.


On illiquid valuations, “We would generally expect reviews at least twice a year by an independent third party and absent that would take a close look at internal processes, challenges and reasons. Valuations can be particularly sensitive to potential conflicts at certain points of the asset raising cycle,” says Newman.


ESG majoring on governance The economic and social aspects of ESG form part of a typical report although not significantly so because clients tend to have their own policies and do their own in-depth research. Governance on the other hand has, of course, always been an important part of ODD.


Newman has for many years been advocating better governance, including lobbying the Cayman Islands Monetary Authority (“CIMA”) against individuals being allowed to hold a multitude of directorships and encouraging improved governance and standards.


“I saw first-hand in 2008/2009 how directors taking a secretarial type approach to their duties were not able to protect investors from big operational events. CIMA later released a guidance statement on governance, and smaller governance firms limiting the number of directorships to around 25 sprang up.”


There are differing opinions about directors’ capacity, with some promising not to take on more than five or six engagements.


perfORM find that good governance at the management company level does not necessarily go hand in hand with good fund governance, as the criteria can be different and indeed the Manco should oversee the adviser amongst other service providers.


“Mancos are responsible for their own ODD on service providers, and both the Central Bank of Ireland and the CSSF in Luxembourg have been looking more closely at this post-pandemic,” says Thom.


There is no simple formula for assessing the quality of governance. There are decisions to be made about the number of directors, diversification of the board and ratios between executive and non- executive directors to name a few, based partly on for e.g. the complexity and nature of the activities unique to the enterprise. perfORM believes that emerging managers require adequate oversight and size should not be used as an excuse to avoid it.


“Experienced directors need not be prohibitively expensive for emerging managers since some directors will align their fees with assets and accept a lower initial fee that could rise as assets grow,” says Thom.


Emerging manager governance Smaller and less experienced managers may need to outsource certain functions and also require their staff to ‘wear more hats’. This is another area where careful judgment rather than fixed formulas should be applied.


“We keep an open mind about outsourcing, so long as there is also a sufficiently senior internal non-investment person, who may well sit on boards and management committees, to oversee it and determine the right balance. It is normal for COOs to utilise external IT and compliance support to some degree, and these internal functions can be expanded as the firm grows,” says Newman.


Upbeat growth outlook perfORM expect to increase revenues substantially in 2023 leading to the team growing further. ODD hires with accountancy qualifications and/or CFA or CAIA charter holders are preferred, but what matters most is that the perfORM team remain passionate and assiduous “ODD-ers”, a phrase that Thom has coined. THFJ


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“Larger managers have historically preferred on-site viewing of certain documents, but Covid greatly improved transparency in terms of online and database


disclosures.” — QUENTIN THOM


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