October 2025 opens with records: total hedge fund assets have reached $4.74 trillion, net inflows in Q2 alone hit $24.8 billion, and allocators are demanding more transparency than ever before. Confluence’s mission to connect capital with credible managers is tested daily by scrutiny, audits, and evolving regulatory frameworks. Few challenges loom as large for emerging managers as the performance audit. In this in-depth interview, an event-driven quantitative manager shares practical audit preparation strategies, exposes growth obstacles, and gives proven recommendations, with supporting data and actionable references every step of the way.
The Numbers Behind the Audits
The due diligence and audit process for allocators and managers is intensive by design. Industry data highlights:
Median due diligence time: 45–60 days (some processes extend to 90 days for more complex multi-asset strategies).
Allocation trends: In Q2 2025, over $23 billion out of $25 billion in net inflows went to major funds (AUM > $5 billion), reflecting how institutional investors prioritize proven, auditable frameworks.
Manager returns: Redemptions in July 2025 fell to 1.56% (the lowest in a year), showing that effective risk controls and transparency are converting diligence into durable investor confidence.
Fees and negotiation: 84% of allocators renegotiated fees in the past 12 months, with transparency and auditability cited as top reasons for reductions or increases.
Interview: Audit Preparation in Practice
“From the first allocator call, I knew every spreadsheet and line of code would be examined,” the manager recounts. Preparation is both technical and psychological:
Monthly internal compliance checks: The manager’s team spends 8–10 hours per month preparing for future audits (well above the industry median of 6 hours, but it saves time during external reviews).
Infrastructure focus: Every major strategy and performance metric is stored on secure, version-controlled environments. Compliance software audits automate checklist adherence, contributing to a 23% reduction in review time for external auditors, based on their last cycle.
Third-party verification: Independent reviews take place annually, with Confluence’s network providing mock audits and manager roundtables. The manager estimates that peer support cut their onboarding-to-first-allocation window from 105 days to 70 days—a 33% improvement.
"Failing to document a single valuations adjustment or missing a regulatory update wasn’t an option. Allocators want a three-year clean track record, real-time dashboard access, and third-party references. It’s not just about the numbers—it’s about the story they tell and who verifies it."
Challenges for Emerging Managers
Emerging managers face outsized audit and compliance burdens:
Resource constraints: 72% of new managers operate with teams of 5 or fewer.
Self-reported challenge: 65% say navigating the “audit gauntlet” is their single most significant barrier to institutional capital.
Cost drivers: Audit complexity rises with fund-of-funds structures (delayed access to underlying fund information and non-standardized policies increase accounting costs by 18–24%).
Documentation lapses: The most common cause of audit delays (cited in 42% of cases) is incomplete or fragmented transaction support records.
Valuation risk: Failure to build a robust valuation policy from inception can extend the audit by up to 25% in time and raise costs by 10–15%.
What Works: Audit Preparation Strategies
Seasoned allocators and managers alike endorse a checklist-driven approach. Essential elements with measurable outcomes:
Step | Impact Metric |
|---|---|
Monthly internal audits | 20–30% fewer post-audit queries |
Third-party verification | 33% faster onboarding |
Automated compliance tools | 23% less auditor review time |
Full regulatory registration, ODD, KYC | Required for all allocations > $100M |
Service provider vetting | 27% fewer fund operation issues |
Allocator’s Essential Audit Checklist
For allocators and managers alike, these are the non-negotiables, validated by recent industry surveys and Confluence’s own manager onboarding data:
Track Record: Minimum three full years of independently audited results, with transparent drawdown explanations.
Verification: Active licenses, operational due diligence, regulatory filings all up to date.
Risk Management: Documented slippage controls, regular stress testing, and clear stop-loss policies.
Technology & Operations: Robust IT infrastructure and documented cybersecurity controls (mandatory for all digital asset and quant strategies).
Fee Alignment: Total expense breakdown including performance fees, high water marks, and commitment terms.
Reporting & Service Providers: Direct access to monthly statements, and independent auditor/admin references on file.
Lessons Learned. Advice from the Field.
Avoid cut-corners: Shortening the ODD cycle saves time in the short-term but increases long-term risk exposure; the recommended minimum is 15–30 days for operational due diligence.
Immediate access: Funds that enable instant data room access have a 29% higher allocator approval rate.
Transparency is non-negotiable: Experienced allocators report that lack of transparency or data access is the number one reason for turning down promising strategies.
Frequently Asked Questions
