"We'll worry about operational due diligence when we need institutional capital."

This mindset is the mistake that costs emerging managers the most. Building fit-for-purpose and robust internal control, governance, and regulatory-compliance frameworks from day one isn't just a box-checking exercise. It's a strategic commitment that creates a foundation for sustainable growth. More critically, this proactive mindset is what builds the investor confidence that unlocks institutional allocations.

The expectations have fundamentally shifted. Today's allocators demand institutional readiness at launch—not promises of future upgrades. Emerging managers once assumed investors would accept 'startup mode' operations at launch. Today, institutional investors dissect your operational and governance infrastructure from the outset with forensic precision, not just your track record.

The question isn't whether you'll face institutional due diligence—it's whether your operational infrastructure will provide the assurance that attracts capital inflows or raise the concerns that keep investors away.

Most people assume hedge funds collapse because of bad investment calls or market crashes.

The reality is far more preventable.

According to recent industry analysis, operational failures—not investment losses—are the #1 reason hedge funds shut down, accounting for 50% of closures. Investment issues come second at just 38%.

What kills funds:

→ Compliance breakdowns and regulatory violations

→ Inadequate risk management frameworks

→ Poor operational infrastructure that can't scale

→ Recordkeeping and communication failures

→ Valuation and reporting inconsistencies

The kicker? These are all governance and operational issues that can be engineered out of existence before they become problems.

Smart fund managers aren't just building investment strategies

—they're architecting operational resilience from day one.

The following article breaks down exactly why operational excellence has become the new competitive advantage in institutional capital raising.

Read the full analysis published in January 2025: https://www.empaxis.com/blog/reasons-hedge-funds-fail

Segantii Capital Management had everything on paper: compliance committees, risk oversight, external consultants, and responsible officers.

Yet in May 2024, this 16-year-old Asian hedge fund collapsed after insider trading charges.

The real story? Having governance structures and having effective governance are completely different things.

The red flags that were ignored: As early as 2021, major banks—including Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—began distancing themselves from Segantii, citing concerns over its trading practices. Yet, these early warning signs were seemingly disregarded internally. Concentrated decision-making and a culture that discouraged dissent meant critical risk signals from financial institutions were systematically ignored.

The broader problem: As this new Advisory Board Centre analysis reveals: "Billions have been lost—not from bad investments but governance failures. As capital allocators demand greater accountability, the hedge fund industry faces a reckoning: reform or risk losing access to institutional capital."

For institutional investors: Operational due diligence isn't just about checking compliance boxes—it's about evaluating whether governance actually works under pressure.

The funds that thrive going forward won't just have the best returns. They will have governance systems robust enough to earn and keep institutional trust.

Read the full analysis published in March 2025: https://www.advisoryboardcentre.com/insight/chrischanarticle/

Every headline about fraudulent fund managers doesn't just damage one firm—it erodes investor confidence across our entire industry. While you're focused on generating alpha, your potential investors are increasingly asking harder questions about operational risk.

The funds thriving in today's environment aren't just the ones with the best returns—they're the ones that can demonstrate bulletproof operational integrity from day one.

Smart hedge fund leaders are getting ahead of this by:

• Establishing robust operational infrastructure that scales with growth and meets institutional standards
• Building an institutional-grade governance framework before you need it
• Implementing robust compliance systems that investors recognize and trust
• Creating transparency protocols that differentiate them from competitors cutting corners

The cost of reactive compliance far exceeds the investment in getting it right upfront. More importantly, operational excellence has become a competitive advantage in investor selection.

Your investment strategy gets you to the table. Your operational infrastructure determines whether you get the allocation.

At Thalia Advisory, we partner with hedge fund leaders to transform governance from cost center to competitive advantage—because what protects you powers you.