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CAIA Level I 2025 Due Diligence: Operational Risk Checklist

CAIA Level I 2025 Due Diligence: Operational Risk Checklist
CAIA Level I 2025 Due Diligence: Operational Risk Checklist

Effective operational due diligence is a cornerstone of manager selection in alternative investments. While quantitative performance metrics gauge investment skill, robust operational infrastructure underpins sustainable returns and mitigates loss from non-investment events. This checklist distills the CAIA Level I 2025 syllabus into a concise, copy-friendly guide to identifying and assessing key operational risks.


1. Defining Operational Risk in Alternatives


Operational risk encompasses losses stemming from people, processes, systems, or external events. In the context of alternative investment manager due diligence, it covers everything from back-office controls to cybersecurity, legal exposures, and business continuity. The CAIA Association emphasizes that “operational due diligence of manager business risk can dominate or override assessment of investment skill”.

Frameworks commonly employed to structure risk assessment include:

  • ISO 31000: A principles-based risk management standard outlining a systematic process for identifying, analyzing, evaluating, and treating risks.

  • COSO ERM: A comprehensive enterprise risk management framework that integrates risk into governance and strategy.


2. Pillars of Operational Due Diligence CAIA Level I 2025 Due Diligence


Organize your review along these eight pillars. For each, use the detailed checklist in Section 3.

Pillar

Focus Area

1. Governance & Organization

Ownership structure, board oversight, reporting

2. Compliance & Legal

Regulatory filings, licenses, AML/KYC procedures

3. Financial Controls & Audit

NAV calculation, valuation policies, audit reports

4. Valuation & Pricing

Fair value hierarchy, price verification

5. Service Providers

Custodian, prime broker, administrators

6. Technology & Cybersecurity

IT infrastructure, security protocols, incident response

7. Business Continuity & Disaster Recovery

Recovery plans, testing, off-site backups

8. ESG & Reputational Risk

Environmental/social policies, conduct monitoring

3. Detailed Operational Risk Checklist


3.1 Governance & Organization

  • Ownership & Legal Structure: Confirm fund entity types, jurisdiction, and change-of-ownership history. CAIA Level I 2025 Due Diligence

  • Board & Committees: Review charters for risk, audit, and valuation committees.

  • Reporting Lines: Map key roles (CRO, COO) and escalation procedures.

  • Succession Planning: Assess contingency for senior key-person exits.


3.2 Compliance & Legal

  • Regulatory Registration: Verify registrations (e.g., SEC, FCA, MAS) and licensing status.

  • AML/KYC Procedures: Examine customer onboarding, enhanced due diligence (EDD) policies, and suspicious activity monitoring.

  • Code of Conduct: Ensure a documented ethics/business conduct policy aligned with CAIA/CFA standards.

  • Litigation & Regulatory Actions: Search for past or pending enforcement actions against the manager.


3.3 Financial Controls & Audit

  • NAV Calculation: Inspect NAV policies, frequency of pricing, and oversight of NAV committee.

  • Valuation Policy: Confirm adherence to fair-value hierarchy (Levels 1–3) and use of independent pricing services.

  • External Audit Reports: Review the most recent audited financial statements and management letters.

  • Fee Verification: Reconcile management/performance fees with partnership agreements.


3.4 Valuation & Pricing

  • Pricing Sources: Identify primary data vendors (e.g., Bloomberg, ICE Data Service).

  • Level 3 Asset Controls: For illiquid holdings, examine approval workflows and valuation committee minutes.

  • Price Verification: Confirm periodic independent price checks or third-party pricing inputs.


3.5 Service Providers

  • Prime Broker: Evaluate counterparty credit risk and margin call processes.

  • Fund Administrator: Assess track record, staff turnover, and onsite inspection results.

  • Custodian: Verify segregation of assets and daily reconciliation procedures.

  • Legal Counsel & Tax Advisor: Ensure relationships with reputable firms and check for conflicts of interest.


3.6 Technology & Cybersecurity

  • IT Architecture: Document system interdependencies, backups, and patch management.

  • Access Controls: Review user-access policies, password protocols, and multi-factor authentication.

  • Incident Response Plan: Confirm existence of a tested cyber-incident playbook and breach notification procedures.

  • Data Encryption & Storage: Validate encryption standards in transit and at rest.


3.7 Business Continuity & Disaster Recovery

  • BCP/DRP Documentation: Obtain the formal Business Continuity Plan and Disaster Recovery Plan.

  • Testing & Exercises: Check records of tabletop exercises and live failover tests within the last 12 months.

  • Alternate Site Readiness: Ensure personnel, systems, and data can be restored at secondary location.

  • Vendor Dependencies: Map critical third-party dependencies and their own BCP protocols.


3.8 ESG & Reputational Risk

  • Environmental & Social Policies: Review written ESG policy and how it integrates into operations.

  • Controversy Screening: Confirm use of third-party data to flag negative news or regulatory fines.

  • Stakeholder Communications: Examine frequency and transparency of ESG reporting to investors.

  • Reputation Scenarios: Assess protocols for managing social media, news leaks, or whistleblower incidents.


4. 2025 Market Considerations


  • Heightened Cyber Threats: Rising ransomware attacks on financial firms mean cybersecurity controls are non-negotiable.

  • Regulatory Scrutiny: AML and ESG disclosure rules are tightening globally; examine alignment with evolving FATF, SEC, and EU directives.

  • Remote/Hybrid Workforce: Validate controls over remote access, endpoint security, and data leakage prevention.

  • ESG Integration: Investors demand proof that operational processes support sustainability goals—look for operational carbon-footprint tracking and supplier audits.


5. Exam Preparation Tips


  1. Memorize the Eight Pillars: Use flashcards to recall each operational-risk category and key checklist items.

  2. Practice Case Scenarios: Work through ODD questionnaires (e.g., ILPA’s ODDQ, AIMA’s DDQ) to apply the checklist to sample managers.

  3. Link to CAIA Learning Objectives: Align each checklist item to the Level I curriculum companion’s keywords under “Operational Due Diligence”.

  4. Understand Frameworks: Be ready to contrast ISO 31000’s risk-management principles with COSO ERM’s governance emphasis.

  5. Focus on Controls Testing: Know how to evaluate the strength of control environments through inquiry, observation, and re-performance techniques.



Operational due diligence is as critical as investment analysis in alternative investments. By systematically applying this checklist—grounded in ISO 31000 and COSO ERM principles—and staying attuned to 2025’s evolving threats (cyber, regulatory, ESG), CAIA Level I candidates can both excel on exam questions and develop practical skills for manager selection. Success comes from blending qualitative insights (culture, governance) with quantitative verification (audit findings, control testing) to form a comprehensive view of operational risk.


Checklist Summary

Governance & Organization:
- Ownership structure, board charters, succession planning

Compliance & Legal:
- AML/KYC, registrations, code of conduct, litigation review

Financial Controls & Audit:
- NAV policies, fair-value hierarchy, audited FS

Valuation & Pricing:
- Data vendors, Level 3 controls, price verification

Service Providers:
- Prime broker, administrator, custodian, legal counsel

Technology & Cybersecurity:
- IT architecture, access controls, incident response, encryption

Business Continuity & DR:
- BCP/DRP docs, testing logs, alternate site, vendor BCP

ESG & Reputational:
- ESG policy, controversy screening, reporting, scenario planning

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