Operational Due Diligence
Operational risk is part of investment risk
A compelling strategy is worthless if assets are not properly safeguarded or if operational controls are weak. Operational due diligence examines the infrastructure around the investment — and in digital assets, a great deal of the genuine risk lives there.
01
Why this is where digital assets differ
In traditional markets, a great deal of operational infrastructure can be taken as read. Custody is performed by long-established institutions, settlement is standardised, and the parties in the chain are familiar. Digital assets inherit none of that by default.
Assets can be held in ways that have no traditional equivalent. Venues can act as exchange, broker and custodian at once. Settlement can be instant and irreversible. The failures of recent years were, with few exceptions, operational rather than strategic — the strategy was not what broke.
So the operational review is not a formality that follows the investment review. It comes first, and a strategy that cannot pass it does not proceed to be assessed on its merits.
02
What an operational review covers
The areas below are assessed before any allocation, and re-examined for as long as it is held.
Legal structure
What do I actually own, and under whose law?
The structure through which an investment is held, the jurisdiction that governs it, and the rights and protections that structure actually confers — as distinct from those it appears to confer.
Custody and key management
Who can move the assets?
How assets are held, whether qualified or institutional custody is used, and how private keys are secured, segregated and controlled. In digital assets this is the single question with the least margin for error.
Segregation of duties
Can one person do the whole thing alone?
Whether the people who instruct a transaction are the people who authorise it and the people who reconcile it. Concentration of authority is a risk regardless of the good faith of the person holding it.
Counterparty and venue exposure
Who else has to stay solvent for this to work?
The venues, brokers and counterparties relied upon, and the concentration and settlement risk that reliance creates — including where one party occupies several roles at once.
Administration and valuation
Who produces the number, and are they independent?
The presence of a credible fund administrator, independent pricing and valuation policies, and how instruments that do not price readily are treated.
Audit
Has anyone independent examined this?
The presence of a recognised auditor, the scope of the engagement, and whether the audit history is continuous rather than recently begun.
Reconciliation and controls
How would an error be caught?
Cash and trade controls, the frequency and independence of reconciliation, and the governance framework that oversees operations day to day.
Infrastructure and cyber resilience
What happens when something fails?
The security, redundancy and resilience of the technology stack against operational failure and cyber threats, and the business-continuity arrangements that apply when it is tested.
Key-person dependence
What happens if one person leaves?
How much of the process, the relationships and the access depends on a single individual, and what arrangements exist for their absence.
Regulatory standing
Who authorised this, and to do what?
The regulatory posture, licensing and jurisdiction of the manager and of the parties around it — first-order questions rather than afterthoughts, because classification and oversight determine real-world risk.
Service providers
Is the supporting cast credible?
The quality and independence of the legal, banking, administration and technology partners appointed, and whether their standing matches the claims made about the structure.
03
It does not stop at the allocation
Operational arrangements change. A manager moves administrator, adds a venue, loses a key person, or alters the way assets are held — and none of those events announce themselves.
Prompt review of material changes to terms, service providers, counterparties, regulatory status or operations is therefore part of the ongoing obligation, not a periodic courtesy. Where the evidence warrants it, allocations are reduced, paused or redeemed.
04
Conflicts, including our own
Asking a manager to disclose its conflicts means little from a firm that does not disclose its own. Ours is this: the signals and systems behind both of our systematic capabilities are produced by an external provider founded by a partner of Block Asset Management. It is a related party, not an arm's-length third party.
The partner concerned is not a member of any investment committee and takes no part in the decision to use the provider, or to deploy any strategy that relies on it. Those decisions are taken by the investment committee for the relevant structure, through the same sequence as any other allocation.
We state it here rather than in a footnote because this is the page on which we ask allocators to take conflicts seriously.
05
What this does not do
Operational due diligence reduces the probability of avoidable failure. It does not eliminate it, and it does not make an investment safe. These are alternative investment strategies in volatile markets, and loss — including substantial loss — remains possible.
Nor is it a guarantee about any third party. A review is an assessment made on the information available at the time, and information can be incomplete or wrong.
Findings on any individual manager or structure are confidential and are not published. What is described here is the process, not its results.
The diligence you would do, done first
This page describes how operational risk is assessed at firm level. Structure-specific materials — including offering documentation and the parties appointed to each structure — are available to eligible investors through controlled access.