ADV filing season yields often untapped due diligence opportunities

We are in the middle of ADV filing season, and according to Investment Management Due Diligence Association Co-founder Dan Strachman, investors need to be paying attention.

Investment managers have 90 days to update their ADVs from the close of their year, roughly 90% of the time that means they will be filing updated information from January 1 through March 30. And for allocators there could be some key facts they are missed if they or their consultant/advisor neglects to review these forms, instead relying solely on investor letters and other correspondence.

“In our view due diligence doesn’t stop once the wire transfer has cleared,” he added. “You want to make sure those dollars at risk are being managed the way you expect them to be managed.”

There are a lot of data scrapers out there offering technology to seek out manager information, said Strachman. These tools will present a report of changes, but smaller investors rather not spend the money for such tools and so they are comparing Form ADV Part 1 from beginning of the due diligence process to the current filing. In his view, if investors are doing it themselves, they are more apt to find something worth investigating.

While it is more cost effective for investors to go online and review these documents themselves it can be time consuming. Still, Strachman said it may be well worth their time.

In Part 1 of the filing, it is the perfunctory information about a firm’s location, board, service providers, jurisdiction, etc. The key here is to keep an eye on ownership. Who owns the firm and whether it has changed is important to look at as well as changes in service providers.

The key is to make sure the management team and the management of the trading desk are consistent with when you as an investor placed money with the firm.

While a change in custodial arrangements will be evident to some investors such as private equity allocators that deal with capital calls on a regular basis, hedge fund investors may not find out as quickly as the transactions are not as frequent. Also, administrator or accounting firm changes wouldn’t be announced in a monthly investor letter either.

The second part of the Form ADV is the marketing information that may give investors some color behind significant changes in organizations.

The level of interest in ADV filing season varies, but it all depends on the level of investor involvement and how often they interact with their investment managers.

“But investors need to know what’s going on, because at the end of the day it’s your money and you need to know what’s going on with it,” said Strachman.

Meanwhile at IMDDA, they continue to see their membership grow. Currently, the group has 425 members worldwide who are mostly executives in the pension, endowment and foundation space.

IMDDA has been building up its online learning platform and certification courses for the group’s Chartered Due Diligence Analyst designation. All classes can be taken by members at their leisure online and are a good way to save on airfare.

Members also have access to free webinars on various topics. IMDDA has also completed industry surveys such as the sexual harassment study that was published last year. The team is now working on a due diligence practices survey in partnership with CohnResnick focusing on the “nuts and bolts” of investor research.