Originally posted at the hedge fund operational due diligence blog www.Corgentum.com/blog an introduction to operational due diligence on business continuity and disaster recover planning
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1. Is Your Hedge Fund Prepared for the Storm? –
Operational Due Diligence on Business Continuity and
Disaster Recovery Planning
With the recent continuing spate of snow storms and extreme weather throughout the United States
the subjects of business continuity planning (“BCP”) and disaster recovery (“DR”) have come back
into the spotlight.
Even minor disaster type events can cause major disruptions to a hedge fund’s operations. From
heavy snow which may prevent employees from accessing the firm’s offices to small scale power
outages and routine internet access outages, occurrences which present the potential for data loss
and business disturbances often occur more frequently than many investors would think.
Often during the course of an operational due diligence review, investors run the risk of being lulled
into complacency when it comes to evaluating a hedge fund’s ability to both continue operations
when a disaster event occurs (i.e. – business continuity) and to restore from a disaster things such
as potential data loss (i.e. – disaster recovery).
Considering Hedge Fund Strategy Appropriateness:
As is the case with the vast majority of issues which should be covered during the operational due
diligence process, certain strategy specific considerations should be taken into account when
evaluating the appropriateness and robustness of a hedge fund’s business continuity and disaster
recovery planning.
For example, a hedge fund which engages in a high-frequency trading strategy should be more
sensitive to risks due to down time from a power outage, loss of internet connectivity or loss of
telephones which would influence the fund’s ability to trade, as compared to a fund which executes
only a handful of trades a week. Similarly, investors performing due diligence on these funds should
take measures to understand the appropriateness of different levels of preparedness for each of
these funds. This is not to suggest that a fund which executes a small number of trades every month
should settle for a mediocre BCP/DR plan for trade connectivity in the event of a disaster event.
However, in reaching an conclusion in relation to the amount of operational risk present at a
particular hedge fund, the nature and weight of the risks relevant to that particular hedge fund
should be considered.
Protecting Critical Data:
Critically important to the successful operations of any hedge fund, is the management and
maintenance of data. Data can include all types of items ranging from daily trade activity files and
security master files to routine employee emails. When a disaster event occurs a hedge fund must
be able to access and restore this data in a timely manner. If not, they could face disruptions which
cause a number of problems including deprive them of market opportunities and delaying production
of investor capital statements