Skip to content

FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds

A fund claims a market-neutral strategy. Monthly returns over 36 months show a regression beta to the equity index of 0.45 with a statistically significant coefficient, and the manager's alpha is small. What is the best conclusion?

The fund's significant 0.45 equity beta contradicts its market-neutral claim, implying returns are largely driven by market exposure. Combined with small alpha, this signals possible style drift or misdescribed strategy that due diligence should investigate with the manager.

  1. AThe fund is consistent with its market-neutral claim because alpha is small
  2. BThe fund's realized equity exposure contradicts the claim, so returns are largely market-driven and style drift should be investigatedCorrect
  3. CThe beta is irrelevant because only volatility matters
  4. DThe fund should be viewed as having negative skill because beta is positive

Explanation

A significant beta of 0.45 means a material share of returns comes from equity market exposure, inconsistent with market neutrality. Small alpha reinforces that returns are beta-driven. It does not prove negative skill, but the stated strategy and actual exposure diverge, warranting a style drift review.

Did you get it right without looking?

One question tells you little. A timed set on Performing Due Diligence on Specific Managers and Funds shows your real accuracy, how long you take and where you lose marks.

Practise Performing Due Diligence on Specific Managers and FundsFree diagnostic mock

More Performing Due Diligence on Specific Managers and Funds questions