Custody
Custody refers to the safeguarding of assets through a qualified custodian and controlled processes for holding and moving assets.
Allocator relevance: A core operational diligence requirement that reduces fraud, misappropriation, and reconciliation risk.
Expanded Definition
Custody defines where assets are held, who can move them, and how positions and cash are reconciled. Strong custody frameworks include segregation of duties, independent verification, and reliable reporting trails. Requirements can vary by investor type and jurisdiction, but custody integrity is widely viewed as foundational.
In private funds, custody intersects with administrator processes, audit readiness, and reporting package quality.
How It Works in Practice
During operational due diligence, allocators confirm custody arrangements, control policies, reconciliation procedures, and exception handling. They look for independent checks, clear authorization pathways, and documentation supporting asset existence and movement.
Decision Authority and Governance
Governance should define control ownership, escalation for exceptions, and periodic reviews. Custody weakness is often treated as a disqualifying operational risk for institutional allocators.
Common Misconceptions
- Custody eliminates operational risk entirely.
- All custodians provide equivalent protections.
- Custody is only relevant for liquid assets.
Key Takeaways
- Custody is a control system, not a guarantee.
- Reconciliation and segregation of duties are critical.
- Custody integrity supports audit and reporting reliability.