Christopher J. Addy - Castle Hall Alternatives

Operational due diligence firm of the year, Castle Hall Alternatives (International & Canada). Gamechanger of the Year (ODD), Christopher J. Addy, Castle Hall Alternatives President & CEO (International & Canada)...

Castle Hall Alternatives, a member of AIMA, is a leading specialist in operational due diligence of alternative and traditional asset managers. 

Castle Hall celebrated its 10th anniversary earlier in 2016, a milestone for the company and a chance to reflect on where the Operational Due Diligence industry has been and how the firm is positioned to serve the needs of asset allocators and gatekeepers as the industry continues to evolve.

Best practice in investment oversight generally, and specifically with respect to operational due diligence, continues to evolve rapidly and Castle Hall is pleased to be recognized as being at the forefront of this field. With a team of more than 50, Castle Hall helps investors around the world build comprehensive due diligence programs across hedge fund, private equity, infrastructure, real estate and long only portfolios.

Built upon Castle Hall’s next generation, online diligence architecture, DiligenceProfessional™ helps institutions, fund of funds, advisors, endowments, foundations, sovereign wealth funds, pension plans and family offices evaluate whether asset managers meet operational best practice.

Castle Hall Alternatives is proud to have been recognized by ACQ5 for both of these award categories.

Operational Due Diligence is Evolving

As the alternative asset industry has grown and matured, the discipline of operational due diligence (“ODD”) has become more prominent. Alternative asset investors no longer make decisions based on investment performance alone: allocators are equally focused on the risk of operational failure—be it through honest error or, in the worst case, through dishonesty and fraud.

Investors also recognize that weak business infrastructure creates an unavoidable drag on performance. An asset manager with weak controls will not have the data, technology, and operational efficiency to ensure optimal implementation of the investment strategy.

ODD, often an optional luxury before 2008, has become a mandatory component of alternative asset investing. Hedge funds and PE managers are no longer “different”, and institutional investors, often subject to fiduciary obligations, cannot accept lower operational standards simply because they are allocating to an alternative manager. As a result, it is becoming a baseline assumption that an alternative asset manager will match the operating standards and mitigate business risks in the same way as established, long-only money managers. ODD is the tool deployed by investors to ensure that alternative investment managers meet these evolving and more demanding requirements.

Against this backdrop, Castle Hall sees the emergence of a new paradigm in ODD, which we call Due Diligence 3.0.

What is Due Diligence 3.0?

Due Diligence 1.0: Pre Madoff. Before 2008, operational due diligence was an optional, “nice to have”. For those investors who did conduct ODD, the process, scope and methodology of emerging ODD programs was very variable. Equally, there was a lack of commonality among hedge fund operating structures, exemplified by the existence of many self-administered funds.

Due Diligence 2.0: Post 2008. In the Diligence 2.0 world, some level of hedge fund operational due diligence is now performed by virtually all asset owners. Diligence scope and methodology has also become somewhat more standardized, although some investors continue to have a “light touch”.

Due Diligence 3.0 is a new model: Responding to an ever more sophisticated Governance, Risk and Compliance environment, ODD must now address four emerging themes and challenges for institutional and private investors.

1. MULTI ASSET CLASS

Operational diligence should be applied across all third party asset manager relationships, not just hedge funds. Investors focused on governance, risk and compliance now require consistent operational risk information across all fund and account holdings, irrespective of asset class.

2. REAL TIME MONITORING, NOT SNAPSHOT REPORTS

Traditional ODD has focused on a schedule of in person diligence meetings, with the output of each ODD cycle often limited to a report memorializing information gathered during each meeting. This process is then repeated every 1-3 years. Diligence 3.0 introduces a new operating model: the foundation of an effective ODD program is now an active, real time monitoring program, where the annual onsite visit and resulting diligence report is just one component of a far broader toolbox of diligence procedures.

3. A RISK-BASED APPROACH

Operational risks for mutual funds, long only managed accounts, private equity funds and real estate investments are very different as compared to a traditional hedge fund. Different diligence procedures should be adopted to reflect different asset classes.

4. FINTECH

Just as hedge fund managers no longer use Excel for accounting, ODD no longer relies on word-processed meeting reports. Technology has become critical to process ever increasing amounts of public and private information. Systems, bandwidth to curate data, and quality reporting and dashboard capabilities are vital to give asset owners an effective view of portfolio risks.

Due Diligence: Solved.

DiligenceProfessional™, Castle Hall’s proprietary online diligence solution, is a risk-management platform for operational due diligence. Chris Addy, Castle Hall President & CEO, states, “In light of the evolution we see in the needs of asset allocators and their gatekeepers globally, we continue to enhance our systems and services to ensure we are providing maximum flexibility and value to our clients. It is truly an honour to have Castle Hall recognized by ACQ5 as the Operational Due Diligence Firm of the Year, and to be personally awarded Gamechanger of the Year for ODD in both the International and Canada categories.”

The guiding principle of DiligenceProfessional™ is flexibility. Providing a powerful set of diligence tools, DiligenceProfessional™ allows investors to outsource their diligence program in full, co-source a program with Castle Hall in combination with internal diligence, risk and compliance professionals, or simply use Castle Hall’s services on an “as needed” basis.

DiligenceProfessional™ tools can be applied to any fund or investment vehicle, and across all asset classes, from hedge funds to private equity to real estate and long only mandates.

“Castle Hall is delighted to receive the award as the Operational Due Diligence Firm of the Year from ACQ5,” says Anne Coady, Managing Director of Castle Hall. “As a firm we are commitment to building an innovative, transparent and cost-effective operational due diligence solution that responds to each client’s unique needs.”

Echo Bell, Castle Hall Director - IT, adds, “These accolades are further testament to the efforts of our growing team and ongoing investment to refine and enhance our technology and service delivery.”

Looking Ahead

Earlier this year, Caslte Hall launched DUE DILIGENCE UNIVERSITY™ - a growing ecosystem of white papers, online tools and other educational resources to support every aspect of the due diligence process. The firm’s inaugural DDU white paper, “Evaluating an Asset Manager’s Cybersecurity Environment: a guide for the operational due diligence practitioner”, and related webinar, will be followed by additional materials, resources, white papers and webinars in the months ahead.

Following our announcement earlier this year of Castle Hall’s partnership with SwissAnalytics, we are pleased to announce the opening new offices in Sydney and Abu Dhabi to better serve our global client network. In response to the changing needs and focus of institutional allocators and investment fund governance professionals, Castle Hall also recently launched GovernanceDiligence™, and CyberSecurityDiligence™.

Looking ahead, the firm expects to continue to grow its team and evolve its capacity and specialized diligence service offerings to meet the needs of institutional and private allocators globally. We are in the process of rolling out our newly remodeled DiligenceProfessional™ client platform with enhanced features and capabilities, delivering additional analytical metrics along with improved operational risk management and due diligence efficiencies to our clients.

These are indeed, exciting times for Castle Hall Alternatives. The firm is grateful to its clients for partnering with Castle Hall to meet their specific operational due diligence and monitoring needs, and to ACQ5 for their recognition of the company’s work.