FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds
A fund-of-funds analyst is starting due diligence on a single-manager hedge fund. The analyst has the fund's marketing presentation and audited financial statements. Which of the following steps is most consistent with a sound due diligence framework for evaluating the fund?
The best approach is to independently verify the manager's background, service providers and track record through external sources. Relying only on manager-supplied materials or audited financials leaves operational and integrity risks unexamined, and operational failures are a major cause of hedge fund losses.
- ARely on the audited financials as sufficient evidence of the manager's reported returns and skip independent checks
- BVerify the manager's background, service providers and reported track record through independent sources, rather than relying only on information the manager suppliesCorrect
- CFocus the review exclusively on historical returns and Sharpe ratio, since qualitative factors cannot be verified
- DDelegate the review entirely to the fund's prime broker because it holds the assets
Explanation
Sound due diligence combines quantitative and operational review and independently verifies manager-supplied information, including background checks, references and service provider confirmations. Relying only on audited financials or marketing materials leaves gaps such as misreported track records or undisclosed issues. Excluding qualitative factors ignores operational risk, a major source of hedge fund failures.
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.
More Performing Due Diligence on Specific Managers and Funds questions
- An allocator assigns due diligence scores to a hedge fund on a weighted scorecard: investment process 40% (score 85), risk management 20% (s…
- An investor is evaluating a hedge fund that claims a 12% annual return with 5% volatility, versus a peer group average of 9% return with 10%…
- A fund of funds assigns a probability of fraud or serious operational failure to each candidate. Manager A has an independent administrator,…
- An allocator is beginning due diligence on a single-manager hedge fund. Which sequencing of work best reflects a sound due diligence framewo…
- An allocator is performing operational due diligence on a hedge fund manager. Which finding about the fund's service providers would be the …
- An allocator reviews a long/short equity manager's three-year track record showing an annualized return of 12% and no down months larger tha…