Manager Selection

What an operational due diligence questionnaire has to establish

Most operational due diligence questionnaires are answered fully and establish very little. The difference lies less in which questions are asked than in whether each one can be answered with evidence, and in what the reviewer does when it cannot.

Manuel E. De Luque MuntanerCEO & Founder

21 August 202610 min read

Key takeaways

A questionnaire is a starting point, not a review — its purpose is to structure a conversation and to surface the questions that need to be pursued elsewhere.
The useful test of any question is whether the answer can be evidenced by a document, an independent party or an observable control, rather than by assurance.
Questions phrased so that the comfortable answer is also the easy one tend to produce comfortable answers.
What a reviewer does with a gap matters more than the gap itself: an unanswered question is a finding, and recording it is the discipline.
Answers age. A questionnaire completed once at onboarding describes a firm that no longer exists in exactly that form.

What a questionnaire is for

An operational due diligence questionnaire is often treated as the review itself. Completed, filed, and taken as evidence that operational risk has been assessed. That is a misunderstanding of what the document can do.

Its real function is narrower and more useful. It structures a conversation so that nothing important is left to chance, it creates a written record of what a manager asserted and when, and — most valuably — it identifies the small number of answers that need to be pursued somewhere other than the questionnaire. A good questionnaire tells the reviewer where to look next.

The test that separates a useful question from a filler one

Almost any question can be answered. The question worth asking is one whose answer can be checked.

Before including a question, it is worth asking what an acceptable answer would look like and how it would be verified. If the only possible verification is the manager's own word, the question may still be worth asking — but it belongs in a different category from one that can be settled by an audited financial statement, a custodian's attestation, a regulator's public register or an independent administrator's report.

Sorting questions this way is unglamorous and changes the character of a review. It converts a long undifferentiated list into a short list of things that can be established and a shorter list of things that have to be taken on trust — and the second list is the one that deserves attention.

How questions get phrased into uselessness

The phrasing of a question determines the answer more than most reviewers expect.

Closed questions invite the comfortable answer. “Do you have a business continuity plan?” is answered yes by almost everyone. “When was it last tested, by whom, and what failed?” is answered by fewer.
Compound questions hide a no. Asking about segregation and reconciliation in one sentence allows a manager to answer the easier half convincingly and leave the other unaddressed.
Leading questions supply the answer. A question that describes best practice and asks for confirmation has told the respondent what to say.
Questions without a time dimension capture a snapshot. “Who are your counterparties?” is less useful than “which counterparties have you added or removed in the last twelve months, and why?”
Questions that cannot produce a bad answer produce no information. If every plausible response is acceptable, the question is documentation rather than diligence.

The areas any digital asset questionnaire has to reach

The specific hazards of this asset class mean certain areas cannot be treated as standard. These are the ones where a traditional template tends to be thin.

Legal structure — what an investor owns, under which law, and what the offering documentation actually commits the manager to.
Custody and key management — who can move assets, how many parties are required, and what happens when key personnel are unavailable.
Counterparty and venue exposure — which entities have to remain solvent, how large each exposure is, and what limits apply.
Administration and valuation — who produces the valuation, whether they are independent of the manager, and how illiquid or unusual positions are priced.
Audit and regulatory standing — who has examined the entity, under what standard, and what a regulator has actually authorised it to do.
Reconciliation and controls — how an error or an unauthorised transfer would be detected, and by whom.
Infrastructure and resilience — what happens when a venue, a provider or the manager's own systems fail.
Key-person dependence — what would stop if one individual left.

What to do with a gap

The moment that determines whether a review was real is the one where an answer is missing, vague or inconsistent with something else in the pack.

The discipline is to record it as a finding rather than to resolve it by inference. A gap may be entirely innocent — a small firm without a dedicated function, a document that exists but was not sent, a question that did not apply. It may also be the only visible sign of something material. Treating the two identically at the point of discovery is what allows the difference to be established later.

A review that produces no findings has usually not looked hard enough, or has been designed so that findings are inconvenient. Neither is a compliment to the process.

Answers age faster than questionnaires are repeated

A questionnaire describes a firm at a moment. Personnel change, counterparties are added, custodians are replaced, and a control that existed at onboarding can quietly lapse.

The practical response is not to reissue the whole document annually, which produces fatigue and copy-paste answers on both sides. It is to identify the small number of answers that would change the assessment if they changed — the custodian, the auditor, the people who can move assets, the venues carrying material balances — and to treat a change in any of them as new information requiring review rather than as an administrative notification.

Block Asset Management

How Block Asset Management helps

Our operational due diligence is a process rather than a document. The questionnaire is where it starts, not where it concludes, and what we do with an unclear answer is the part that matters.

Eleven defined assessment areas

Our operational review covers legal structure, custody and key management, segregation of duties, counterparty and venue exposure, administration and valuation, audit, reconciliation and controls, infrastructure and cyber resilience, key-person dependence, regulatory standing and service providers.

Evidence sought before assurance is accepted

We look for documentation, independent attestation and observable controls, and we record where an answer rests on the manager's word alone.

An unclear answer treated as a finding

Where something cannot be established, that is recorded as such rather than resolved by inference — which is what allows it to be pursued.

Review that continues after allocation

Operational review does not stop at the point of allocation. A material change at a manager or one of its providers is treated as new information.

Assessed against the specific structure

Our structures differ in their arrangements, so an assessment is made against the structure in question rather than described in the aggregate.

Conflicts examined, including our own

Relationships that could affect an assessment are identified and disclosed, on the principle that a conflicts review excluding the reviewer is incomplete.

The value of an operational due diligence questionnaire is not in its length. It is in how many of its questions can be answered with something other than assurance, and in whether the reviewer is willing to write down that one of them could not be.

If your organisation is building or revising an operational review process, our investor relations team can discuss how operational due diligence is conducted within our own.

Important information

This material is provided for information purposes only and is intended for professional and qualified investors. It is general commentary on operational due diligence practice and does not constitute investment, legal, tax or operational advice, nor an offer, solicitation or recommendation of any strategy or financial instrument. It does not reproduce any questionnaire used by Block Asset Management and does not describe findings in respect of any manager or structure; those are confidential. Operational due diligence reduces but cannot eliminate risk. Digital assets are volatile and involve significant risk, including the possible loss of the entire amount invested. Past performance is not a reliable indicator of future results.

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