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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

A fund of hedge funds receives a request from an underlying manager to waive transparency, offering only aggregated monthly exposure summaries. The fund's allocator is paid based on assets raised, and the fund's risk team wants to preserve independent oversight. Which action is most consistent with sound organizational practice?

The independent risk function should set minimum transparency standards that the allocator cannot waive alone. The allocator's pay depends on assets raised, creating a conflict that favors accepting weak disclosure. Independent ownership of standards controls this, whereas track record or annual audits do not give timely exposure information.

  1. AAllow the allocator to decide alone because they know the manager best
  2. BAccept the summaries because the manager has a strong track record
  3. CHave the independent risk function set minimum transparency standards that the allocator cannot waive unilaterallyCorrect
  4. DReplace risk monitoring with reliance on the manager's audited annual statements

Explanation

The allocator is paid on assets raised, so has an incentive to accept weak transparency to win allocations. Minimum standards owned by an independent risk function, with waivers requiring separate approval, manage this conflict. Track record and annual audits do not provide timely risk information.

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