79% of fund managers can’t beat the S&P 500. This statistic underscores a key industry issue: the concentration of decision-making power in the hands of individual fund managers.
Selecting the right fund manager is a critical decision for investors. With the potential for human error, misconduct, or simply poor investment decisions, it’s imperative for funds to implement robust due diligence processes to protect themselves and their fund managers.
Allianz Global Investors, an asset management fund with over $555 billion AUM, faced over $5 billion in regulatory fines and restitution because of its former fund manager’s actions. At Allianz (AGI), former fund manager Gregoire Tournant managed $7 billion in assets and faces sentencing for various fraud and other crimes related to his time at the firm.
Other cases include fund founder and investment manager, Michael Wayne Williams. After convincing consumers to invest, Williams used their capital for unapproved purposes, including settling his own civil lawsuits. Over time, he misused over $3.6 million, and the firm was dismantled.
Such cases often result from hidden red flags and concealed reputational risks. A study published by The Hedge Fund Journal examined fund managers’ due diligence and behavior, finding a major link between red flags from reputational due diligence, like bankruptcy, liens and judgments, etc., and firm breakdown.
The same study found that of the nearly 4,000 firms analyzed, 17% of funds had red flags indicative of a reputational crisis hiding in plain sight. Many of these lay in the fund managers’ backgrounds, like past DUI, or civil suits.
Red flags refer to areas of reputational risk, a key concern for modern companies. The study concluded that reputational checks “can reveal red flags indicative of character flaws in management that can have substantial and devastating repercussions on the success of the fund and, thereby, the investment.”
Recent figures show that a company’s reputation comprises 63% of its market value. Reputational due diligence is key to a fund’s financial viability, considering its impact on consumer behavior.
Why Firms Need Deeper Checks: Fund Manager Vetting
In today’s digital age, early situations and fraud cases spiral quickly, snowballing over time. Because of their role’s oversight and demands, fund manager due diligence is critical for firms looking to protect their investments, operations, and future viability.
While basic background checks and reputational due diligence are critical first steps, they may not provide the whole picture to assess fund manager risk adequately. More comprehensive and in-depth checks can uncover additional red flags and potential issues.
Enhanced reputational due diligence goes beyond the public record, often including discreet interviews with key industry sources and multiple checks. Human intelligence can shed light on a fund manager’s character, management style, and potential concerns that may not appear in official documents.
These more extensive checks require specialized expertise and resources, but they’re essential for uncovering hidden risks and ensuring a complete picture of a fund manager’s background and suitability.
Vcheck offers extensive, in-depth due diligence capabilities for funds. Our open-source intelligence (OSINT) and extensive human intelligence (HUMINT) help firms contextualize risk and safeguard their ROI. Discreet interviews broaden our scope and close the paper-information gap in over 140+ countries.
Considering their vulnerable and high-risk position, fund managers have a great responsibility to their firm and to the transparency and culture of our broader financial system. By conducting thorough due diligence, including in-depth checks and enhanced due diligence, along with ongoing monitoring, investors can increase their chances of selecting fund managers capable of delivering superior returns while managing risk effectively.
To learn more about how Vcheck’s fund manager due diligence protects investment funds and their staff, contact us.
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