FRM Part II · FRM Exam Part II · Illiquid Assets
A fund of funds offers quarterly redemptions to investors but holds mostly illiquid private credit positions. Which feature best mitigates the liquidity mismatch?
Gates, notice periods and lock-ups align redemption terms with how quickly the underlying assets can be sold, reducing run risk and forced fire sales. Daily dealing, guaranteed NAV redemptions or added leverage would widen the liquidity mismatch.
- ADaily dealing with no notice period
- BGates, notice periods and lock-ups aligned with the asset liquidation horizonCorrect
- CPromising redemptions at the last reported net asset value regardless of market conditions
- DIncreasing leverage to meet redemptions
Explanation
Gates, notice periods and lock-ups align investor liquidity terms with asset liquidity and limit run risk. Daily dealing and guaranteed NAV redemptions worsen the mismatch, and leverage increases fragility.
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