Investment Manager Due Diligence Checklist: The 2026 Complete Checklist

Investment manager due diligence is the systematic evaluation institutional allocators conduct before committing capital to a fund manager — whether hedge fund, private equity, venture capital, or any other alternative investment vehicle. The discipline is governed by ILPA (Institutional Limited Partners Association) standards, SEC Investment Adviser Act requirements, and the operational due diligence (ODD) frameworks developed post-Madoff.

This guide covers all 6 functional categories of investment manager diligence with the specific items institutional investors review. It’s derived from the ILPA Due Diligence Questionnaire, SEC examination priorities, and the operational due diligence best practices that emerged post-Madoff (2008). Whether you’re an LP allocator, family office, fund-of-funds, or fund manager preparing for institutional capital, this is the foundation.

CT Acquisitions runs sell-side M&A processes for founder-owned U.S. businesses. Many of our clients are investment manager principals exiting their firms via sale to PE platforms, succession to junior partners, or strategic mergers. Understanding institutional DD is essential for both buyer and seller perspectives.

Investment Strategy & Track Record

• Investment philosophy and edge: documented thesis, repeatability, market inefficiency exploited.
• Strategy details: long/short, geographic focus, sector focus, market cap range, position sizing rules.
• Track record: gross + net returns by year, IRR for private funds, since-inception cumulative.
• Attribution analysis: where returns came from (strategy, security selection, market timing, leverage).
• Drawdown history: largest drawdown, time to recover, behavior in 2008 / 2020 / 2022 stress periods.
• Peer benchmarking: comparison to peer funds in same strategy, percentile ranking.
• Capacity analysis: AUM at which strategy degrades, current AUM as % of capacity.
• Style drift: has the manager stayed true to stated strategy over time?
• Concentration: top 10 positions as % of NAV, position size limits.
• Counter-factual: would the strategy have worked in different market regimes?

Operations, Compliance, Risk

Operations

• Custody: third-party (institutional preferred) — Goldman Sachs Custody, State Street, BNY Mellon, JPMorgan Custody.
• Administrator: independent fund administrator (Citco, SS&C GlobeOp, MUFG, Apex Group, Standish, NAV Consulting).
• Auditor: Big 4 preferred (PwC, KPMG, Deloitte, EY) or specialty (Cohen & Co, EisnerAmper, RSM, Marcum).
• Prime broker if applicable.
• Fund counsel: top-tier preferred (Paul Weiss, Schulte Roth & Zabel, Simpson Thacher, Kirkland & Ellis, Sidley Austin).
• Valuation: independent valuation for illiquid positions; documented methodology.

Compliance & Regulatory

• SEC Form ADV Parts 1, 2A, 2B + supplements.
• SEC exam history + deficiencies + remediation.
• State investment adviser registrations.
• CFTC/NFA registration if commodities/futures.
• Code of ethics + personal trading policy.
• Privacy policy.
• Anti-money laundering (AML) program.
• FCPA / sanctions compliance.

Risk Management

• Position limits + sector limits + leverage limits.
• Stop-loss policy.
• Stress testing methodology.
• Liquidity risk + redemption gates + side pockets.
• Counterparty risk + netting agreements.
• Business continuity plan + disaster recovery + cybersecurity.

Organizational, Infrastructure, Legal

Organizational

• Ownership structure: GP, LP, fund management entity.
• Key person risk: founder + senior PMs; succession plans.
• Partner compensation + carried interest split + vesting.
• Equity holdings of senior team in the management entity.
• Personnel turnover (last 5 years).
• Background checks on senior personnel.

Operational Infrastructure

• Trading and order management technology.
• Portfolio management system.
• Compliance and risk monitoring technology.
• Investor reporting technology + reporting cadence.
• Cybersecurity: penetration testing, incident response, SOC 2 audit.
• Data security + privacy controls.
• Disaster recovery testing.

Legal & Documentation

• Limited Partnership Agreement (LPA) for funds.
• Private Placement Memorandum (PPM).
• Subscription documents.
• Side letters with other LPs.
• Capital call mechanics.
• Fee structure: management fee (typical 1.5-2% for hedge funds, 1.5-2.5% for PE), incentive fee/carried interest (typical 20% with hurdle).
• Redemption terms + gates + holdback.
• Pending litigation + claims history.
• Regulatory enforcement actions.

Frequently Asked Questions: Investment manager due diligence

What is investment manager due diligence?

The systematic evaluation institutional allocators conduct before committing capital to a fund manager. Covers 6 categories: Investment Strategy & Track Record, Operations & Compliance, Risk Management, Organizational, Operational Infrastructure, Legal & Regulatory. Standard reference: ILPA DDQ.

What is the ILPA DDQ?

Institutional Limited Partners Association Due Diligence Questionnaire — the industry-standard template for institutional LPs evaluating new managers. Covers investment strategy, organizational, operations, valuation, fund structure, performance.

What is operational due diligence (ODD)?

A specialized DD discipline that emerged post-Madoff (2008). Validates the operational independence of the manager: third-party custody, independent administrator, independent auditor, segregated valuation. Distinct from investment DD.

Who runs investment manager DD?

Institutional LPs: endowments, pension funds, sovereign wealth funds, family offices, fund-of-funds. Often supported by specialty consultants: Cambridge Associates, Albourne Partners, Aksia, NEPC, Mercer.

How long does it take?

60-120 days for new manager evaluation. 30-60 days for annual monitoring reviews of existing managers.

What’s the difference between investment DD and operational DD?

Investment DD evaluates strategy, edge, track record, attribution. Operational DD evaluates the firm’s back-office: custody, administration, audit, valuation, technology, controls.

What is Form ADV?

SEC filing required of all Investment Advisers Act-registered investment advisers. Parts 1 (factual data about firm), 2A (brochure describing services), 2B (brochure supplements for individuals providing advice).

Who are the top fund administrators?

Citco, SS&C GlobeOp, MUFG Investor Services, Apex Group, Standish, NAV Consulting. Standard for institutional-grade funds.

What is a side letter?

A separately-negotiated agreement between a fund and a specific LP, granting that LP terms different from (typically more favorable than) the standard LPA. Must be disclosed to other LPs.

Does CT Acquisitions help investment manager exits?

Yes. We run sell-side M&A processes for principals exiting RIA/wealth management firms, hedge funds, and PE firms via sale to consolidators, succession to junior partners, or strategic merger. Buyer-paid model: seller pays nothing.

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