Building a fund due diligence questionnaire that survives scrutiny

The due diligence questionnaire is the one document a fund produces for a reader who is professionally obligated to disbelieve it. Allocators treat the pitch deck as marketing; they treat the DDQ as testimony — checked line by line against regulatory filings, service-provider confirmations, and the fund’s own offering documents. Since the Fifth Circuit vacated the SEC’s private fund adviser rules in June 2024, no standardized disclosure regime has replaced them: the DDQ, with the offering documents, remains the core of the formal record of what a fund tells investors.

What follows: structure, evidence standards, the questions managers answer badly, and pre-empting the second round.

Start from the standard, then answer the harder version

Two templates define the baseline. In private equity, ILPA’s Due Diligence Questionnaire 2.0 — current version dated November 2021 — is what most institutional LPs build from. For hedge fund and private credit strategies, AIMA’s illustrative questionnaire is the counterpart: modular since 2017, with a 2025 edition that added a private markets module and reworked the performance-presentation, outsourcing, technology-risk, and expense-disclosure questions.

The practical use of these templates is not to wait for them. Most bespoke allocator questionnaires are remixes of the standards, and a manager meeting a question for the first time inside a live process answers it worse than one who drafted, debated, and evidenced the answer in private. Complete the relevant standard before anyone asks, and organize the master document the way a reviewer works — ownership, investment process, operations and service providers, compliance, fund terms — not the way the org chart sits.

The evidence standard is substantiation on demand

Under U.S. law, DDQ answers carry legal weight whether or not they look like marketing. Advisers Act Rule 206(4)-8 prohibits any untrue statement of material fact, or misleading omission, to any investor or prospective investor in a pooled vehicle — a bespoke questionnaire response is squarely covered, with no need to qualify as an advertisement.

The Marketing Rule adds a second layer. A one-on-one DDQ response is generally not an advertisement under the rule’s definition. But DDQ language rarely stays one-on-one; it gets recycled into materials sent to multiple investors, and at that point the rule’s general prohibitions attach — including the requirement that the adviser have a reasonable basis to believe it can substantiate every material statement of fact upon SEC demand.

That phrase is the working standard for every answer, wherever it will travel: nothing ships unless the file behind it already exists. If the questionnaire says wires require dual authorization, the authorization matrix is a document. If it says the administrator strikes the NAV, the service agreement says so too.

Write for the reader who verifies

The SEC’s 2014 risk alert on how advisers perform diligence of alternative managers remains the staff’s most complete public map of institutional practice, and it describes a reader who checks. Examiners observed allocators confirming relationships and assets directly with administrators, custodians, and auditors; requesting administrator-issued transparency reports showing the share of positions independently confirmed and the book’s breakdown across fair-value levels; commissioning background checks; pulling Form ADV through the SEC’s IAPD database and BrokerCheck records of FINRA-registered firms and individuals; and running quantitative screens — bias ratio, serial correlation, skewness — for returns that look managed. Many gave operational due diligence teams power to veto any manager candidate.

The drafting implication: every number in the questionnaire must match a record the manager does not control. Assets, disciplinary history, affiliates, and custody answers get checked against the ADV; performance and valuation answers against the administrator and the audit. The same alert flagged advisers whose practice deviated from their disclosures and whose marketing overstated their processes — both deficiencies in their own right.

The questions managers answer badly

Three failure patterns recur.

Compliance described aspirationally. A year ago this week, the SEC settled with Navy Capital Green Management over statements in DDQs sent to prospective investors. The questionnaires said the firm adopted a written anti-money-laundering policy, with implementing procedures and ongoing review; offering and other documents described the firm as “voluntarily complying” with AML due diligence laws. For stretches of 2018 through early 2022 it did not always perform the diligence described. Censure, and a $150,000 penalty. The instructive detail: the answers came in investor-requested questionnaires and were still actionable.

The AML question itself, answered as of today. FinCEN’s AML program rule for investment advisers is not in effect — a final rule published this month delays it to January 1, 2028, and the agency will revisit the rule’s substance in the interim. The defensible answer in January 2026 describes the program the fund actually runs — typically contractual, often partly delegated to the administrator — names who operates it, and claims nothing more. Overstating voluntary compliance is precisely what drew the charge above.

Track-record attribution. In 2020 the SEC imposed a $1 million penalty on Old Ironsides Energy for presenting a large legacy position as part of its directly managed track record while raising over $1.3 billion; the position was a passive investment in a fund advised by a third party. Attribution deserves its own brief, but in the DDQ the rule is short: state exactly what the team managed, in what role, with discretion or without.

The principle binds both sides of the table. In the Hennessee Group matter, an allocator told clients it performed a five-element evaluation and skipped two — diligence promised but not performed was itself the violation.

Pre-empting the second round

Second-round follow-ups are predictable. The 2014 alert lists the warning indicators that trigger them: returns that do not correlate with the stated strategy, managers dominating the valuation process, concentration in a single position or sector under a purportedly diversified strategy, multiple changes in key service providers, qualified opinions or related-party transactions in the audited financials, undisclosed conflicts, and personnel insufficiently knowledgeable about their purported strategy.

Each indicator maps to a questionnaire section, so the second-round question can be answered in the first round. Where the honest answer touches an indicator — a provider change, a related-party arrangement, a valuation process that necessarily involves the manager — state the fact plainly and put the compensating control beside it. An emerging manager will trip some indicators by definition; the unforced error is letting the allocator discover the gap. The answer that survives arrives with its own follow-up already addressed.

A questionnaire is maintained, not written

DDQ answers age. The control described in March must be the control still running in November, because the gap between disclosure and practice is an examination finding on its own and, as the cases above show, an enforcement theory. Treat the master DDQ as a governed document: one owner, reconciled against Form ADV and the offering documents on a schedule, re-opened every time a provider, process, or person changes. The cheapest moment to fix an answer is before it is sent.

SetOne Labs builds and pressure-tests fund DDQs the way allocators read them — answer by answer, against the evidence file each answer requires. To discuss a questionnaire in confidence, begin a conversation.

SetOne Labs provides advisory services and general information. Nothing here is legal, tax, or investment advice.