Operational Due Diligence (ODD)

Definition

Operational due diligence is the process of evaluating the non-investment risks associated with a manager. It includes compliance framework, trade operations, valuation processes, financial controls, cybersecurity, business continuity, conflicts management, and the quality of service providers (administrator, auditor, legal counsel, custodian). ODD exists to reduce the risk of operational failures that can impair returns regardless of strategy quality. Allocator Context ODD is a standard requirement for many institutional allocators and for higher-stakes strategies where liquidity, leverage, or complex instruments increase operational risk. Smaller allocators may run abbreviated ODD, but many still require baseline comfort around custody, valuation methodology, governance controls, and reporting reliability. Decision Authority ODD findings often act as a “gate.” Many allocators will not proceed to final approval without ODD clearance. Material weaknesses—weak controls, unclear valuation policies, poor segregation of duties, or inadequate service providers—can trigger rejection or require remediation prior to allocation. Why It Matters for Fundraising Operational readiness is a frequent hidden blocker. Managers that can clearly describe their operational setup, valuation governance, and reporting discipline are easier to approve. Conversely, vague answers in ODD create risk perception that can outweigh investment merit. Key Takeaways ODD evaluates non-investment failure risk Often a hard gate for institutions Service providers and controls matter Transparency and clarity reduce friction