FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds
A fund offers quarterly redemptions with 45 days' notice. Its portfolio is 60% liquid assets that can be sold within 5 days, 25% that can be sold within 60 days, and 15% that would take over 180 days to liquidate. An investor worries about a run in which 40% of capital is redeemed at the next dealing date. Assuming no gates and sales at carrying value, what is the most accurate conclusion?
A 40% redemption can be met because 60% of assets are liquid within five days, but paying it out of the liquid bucket leaves the remaining portfolio far more illiquid, with illiquid assets rising from 15% to 25% of the fund. This disadvantages remaining investors.
- ARedemptions can be met from the liquid and semi-liquid assets but would leave the remaining investors with a more illiquid portfolioCorrect
- BRedemptions can be met from the liquid assets alone without changing the portfolio's liquidity profile
- CThe fund cannot meet any redemptions because 15% is illiquid
- DRedemptions of 40% are fully covered by the 15% illiquid bucket
Explanation
The liquid bucket is 60% and the 25% semi-liquid bucket gives 85% sellable within 60 days, so 40% can be met. Selling 40% of the most liquid assets leaves 20% liquid, 25% semi-liquid and 15% illiquid, so illiquid assets become a larger share (15/60 = 25%). Remaining investors bear this adverse shift.
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