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Castle Hall, a specialist provider of operational due diligence to hedge fund investors, emphasizes the necessity of independence throughout the due diligence process.

“In the aftermath of the Madoff fraud, investors realize that independence is the single, most important element of the due diligence process,” said Chris Addy, CA CFA, Castle Hall’s President and CEO. “At Castle Hall, we are proud to offer a unique, unconflicted model which unambiguously aligns our interests with those of our investor clients.”

Castle Hall believes that the independence - and therefore effectiveness - of operational due diligence is impacted by two conflicts of interest. Firstly, there is an "investment versus operations" conflict within asset management and asset advisory businesses. If firm income depends on finding managers with good performance, operational risks may be outweighed by the need to allocate to managers with attractive track records. Secondly, there is a clear conflict of interest if a hedge fund consultant provides services to both hedge fund managers as well as investors.

Chris Addy noted that “Castle Hall does not manage assets, provide investment advice, or recommend funds based on investment performance. Our fees are based solely on a fixed cost per review and are not influenced by client assets, performance or whether we pass or fail a fund. We therefore avoid any ‘investment vs. operations’ conflict: irrespective of the investment case, we provide an objective assessment of a fund's operational quality.”

Castle Hall's independence is also strengthened by its consistent, “investor pays” model. Anne Coady, CA, Managing Director, said that “Castle Hall works with a group of leading institutional investors, fund of funds and endowments. Our due diligence reports are made available confidentially to our clients and are not pre-screened by managers. This means we are always free to highlight operational deficiencies as well as strengths and, if necessary, we can "fail" hedge funds which do not meet our operational criteria.”

Unlike many industry consultants, Castle Hall has also made a deliberate decision not to provide services to hedge fund managers. The firm believes it is impossible to complete an independent due diligence review on a manager which is also a consulting client.

Gillian Scott, CA CFA, Managing Director said, “Many consultants provide a myriad of services to managers alongside their ‘independent’ due diligence for investors. We believe this creates a blatant conflict of interest: as such, Castle Hall does not audit hedge funds, act as a compliance consultant, assist with fund launches, sell legal advice, act as a director, provide an outsourced back office or provide third party marketing services. We believe that this is the only way to retain a true standard of independence at each stage of the due diligence process.”