The part of diligence that has nothing to do with your strategy, and the part most likely to end your raise.

In short: Operational due diligence, or ODD, is the allocator’s examination of everything that is not the investment strategy: governance, service providers, valuation, financial controls, compliance, technology, and business continuity. It answers one question, whether the operation fails before the strategy pays off. It is now the single biggest reason allocators reject emerging managers, cited by 86% in the 2026 AIMA and Marex survey, ahead of any performance concern.

Most emerging managers prepare for diligence as though it is an interrogation of their edge. They rehearse the strategy, the attribution, the risk framework. Then the allocator’s operational team asks who calculates the NAV, how positions are reconciled, and what happens if the portfolio manager is hit by a bus, and the manager has no answer.

Diligence is two separate reviews:

• Investment due diligence looks at whether the strategy works.
• Operational due diligence looks at whether there is a functioning business around it. The second one is now the more common cause of a no.

I’ve seen strong strategies fail ODD because the manager treated the operation as an afterthought.

So: what ODD covers, and how to clear it.

What ODD actually examines

ODD is the allocator’s assessment of operational risk: the risk that something breaks in the middle or back office, in valuation or compliance, or in a service-provider relationship, regardless of how the strategy performs. It is usually run by a separate team from the investment analysts, often with a veto. A fund can pass investment diligence with flying colours and still be killed by the ODD team, and frequently is.

The underlying question is simple. An allocator is about to hand you money for years. They need to know the operation will not lose it through a control failure, a valuation error, a compliance breach, or a provider collapse, before the strategy ever gets the chance to compound.

Why ODD, not performance, is what rejects you

The 2026 AIMA and Marex emerging manager survey put operational due diligence as the number one reason allocators pass, at 86%, up from 83%. (I went through that survey in Easier to Get In. Harder to Deserve It.) Fear of investment-style drift rose to 84%, and “unrealistic targets or poor business plan” to 80%. Fees, the thing managers agonise over, sit well down the list. The reasons allocators say no have moved off your numbers and onto your operation.

There is a survival reason behind this. Goldman Sachs data cited by AIMA found only about half of hedge funds are still in business after six to seven years. Allocators have watched funds close when the strategy was fine and the business underneath it broke. ODD is how they try to avoid funding the half that fails, and it is why a clean operation has become a fundraising asset, not just a compliance obligation.

The areas allocators review

ODD reviews cluster into a handful of areas. This is what an operational team asks to see.

Governance and organisation. Who runs the firm, how decisions are made, and whether duties are separated so that no single person both trades and settles. Organisational charts, role documentation, and segregation-of-duties controls.

Financial and accounting controls. How cash, positions, and trades are reconciled daily and monthly, how the NAV is calculated, and proof that the financial data is accurate and independently verifiable.

Valuation and pricing. A formal valuation policy setting out how every asset is priced, with evidence it is applied consistently. This matters most for anything hard to value.

Service-provider oversight. Contracts and monitoring for your fund administrator, custodian, auditor, and any outsourced functions, showing you actively manage third-party risk rather than assume it away.

Risk management and business continuity. An operational risk framework, a business continuity plan, and disaster-recovery procedures, with evidence they have been tested rather than written and filed.

Compliance. A compliance function built in from the start rather than bolted on, with the policies and monitoring an institutional investor expects to exist before they arrive.

What a thin operation looks like from their seat

The failures that sink ODD are rarely dramatic; they are gaps. One person calculating the NAV with no independent check. A valuation policy that exists as a sentence, not a document. A business continuity plan nobody has ever tested. Compliance that is really the founder promising to get to it. An administrator chosen on price, with nobody monitoring them.

Each gap on its own might be survivable. Together they tell an operational team that the manager did not take the operation seriously, and that is the judgement that ends the process. Often the allocator never tells you this was the reason. They simply go quiet, because naming an operational concern invites an argument they have no reason to have. The transparency that wins ODD is the same radical honesty that wins the rest of the raise: name your gaps and show what you are doing about them, rather than polishing over them (Performance Gets You the Meeting. It Won’t Get You the Cheque).

How managed accounts change the ODD picture

One structural point worth knowing. From the allocator’s side, a managed account can make ODD far simpler and lighter, because they own the structure, control the service providers, and see the portfolio directly. A lot of fund-level ODD questions answer themselves when the allocator can watch the account in real time. This is part of why a managed account can get an emerging manager backed earlier than a commingled fund would.

But it does not make you ODD-proof. The core operational risk still sits with you: governance, trade operations, compliance, controls. The structure removes a category of fund-level risk; it does not remove the manager risk that ODD exists to test. (The full picture, from the manager’s side, is in Hedge Fund Managed Accounts.)

How to pass operational due diligence

Build the operation before you need it. The managers who clear ODD treat it as day-one infrastructure rather than a scramble triggered by a diligence request. Get an independent administrator and auditor, a written and applied valuation policy, real reconciliation, a tested business continuity plan, and a compliance function that exists before an allocator asks.

Then volunteer it. Walk the operational team through your controls before they dig, name the gaps you are still closing, and show the plan and timeline. An allocator who sees a manager who takes the operation as seriously as the trade relaxes. An allocator who has to prise operational answers out of you concludes the opposite, and there is no returns figure that fixes that conclusion.

Cláudia

Frequently asked questions

What is operational due diligence for a hedge fund?

Operational due diligence, or ODD, is the allocator’s review of everything that is not the investment strategy: governance, service providers, valuation, financial controls, compliance, technology, and business continuity. It assesses the risk that the operation fails before the strategy pays off, and is usually run by a separate team from the investment analysts, often with a veto.

Why is operational due diligence so important to allocators?

Because an operational failure can lose their money regardless of how the strategy performs. The 2026 AIMA and Marex survey found ODD is the top reason allocators reject emerging managers at 86%, and Goldman Sachs data cited by AIMA found only about half of hedge funds survive six to seven years.

What does an ODD review cover?

Governance and separation of duties, financial and accounting controls including NAV calculation and reconciliation, a formal valuation policy, service-provider oversight of administrators, custodians and auditors, risk management with a tested business continuity and disaster-recovery plan, and an embedded compliance function.

Why do allocators reject emerging managers on operations rather than performance?

Because performance is roughly a fifth of the decision and a fund with weak operations may not survive long enough for the strategy to matter. In the 2026 AIMA and Marex survey, operational due diligence (86%), style-drift fear (84%), and poor business planning (80%) all ranked above fees as reasons to pass.

How do you pass operational due diligence as a new hedge fund?

Build the operation before you need it: independent administrator and auditor, a written and applied valuation policy, real reconciliation, a tested business continuity plan, and a compliance function that exists before it is asked for. Then volunteer your controls and name any remaining gaps rather than waiting to be caught out.

Does a managed account make ODD easier?

From the allocator’s side, often yes, because the allocator owns the structure and sees the portfolio directly, which answers many fund-level questions. But the core operational risk still sits with the manager, so a managed account reduces ODD scope without removing it.

Key takeaways

• ODD is the review of everything that is not the strategy: governance, providers, valuation, controls, compliance, continuity. It is often run by a separate team with a veto.
• It is now the top rejection reason for emerging managers at 86% (AIMA/Marex 2026), ahead of style drift (84%), weak business plans (80%), and fees.
• The failures are gaps, not disasters: single-person NAV, an unwritten valuation policy, an untested continuity plan, price-picked providers.
• Build the operation before you need it and volunteer it. Naming your gaps beats being caught with them; allocators go quiet rather than tell you the operation failed.
• A managed account reduces ODD scope for the allocator but does not remove the manager-level operational risk ODD tests.

This publication is provided for educational and informational purposes only. The views and opinions expressed are those of the author and do not necessarily reflect those of any third party.

Nothing contained in this publication constitutes investment, legal, tax or other professional advice, nor should it be relied upon as such. Nothing in this publication constitutes an offer, invitation, recommendation or solicitation to buy or sell any security, fund or other financial instrument, or to engage in any investment activity.