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

A fund of funds invests in a hedge fund with quarterly redemptions, 60 days' notice, and a 25% investor-level gate per quarter. The fund of funds owns 40% of the hedge fund's capital and wants to redeem its entire stake. Assuming the gate applies to each investor's holding and no other restrictions apply, what is the minimum number of quarterly redemption dates needed to fully exit?

Four quarterly redemption dates are needed. An investor-level gate of 25% allows only a quarter of the original holding to leave each quarter, so 100% divided by 25% equals four. The 40% share of fund capital does not change this because the gate applies per investor.

  1. A1
  2. B2
  3. C4Correct
  4. D3

Explanation

A 25% investor-level gate lets the investor redeem 25% of its original holding each quarter. Full exit therefore takes 100/25 = 4 redemption dates. Choosing 3 would wrongly assume the initial redemption is not gated, and 1 ignores the gate. The 40% ownership is irrelevant because the gate is at investor level.

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