FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
A hedge fund manager launches a new fund and wants the structure to reduce operational risk through independence of functions. Which arrangement best supports this objective?
The best arrangement is an independent administrator calculating NAV together with a risk function reporting separately from the portfolio manager. This segregation of duties removes the incentive and ability of those earning performance fees to influence valuation or hide risk, reducing operational and conflict-of-interest risk.
- AThe portfolio manager also approves the valuation of illiquid positions to speed up month-end reporting
- BAn independent administrator calculates the NAV and a separate risk function reports to the chief risk officer rather than to the portfolio managerCorrect
- CThe chief financial officer also serves as head of trading to reduce staff costs
- DThe fund's prime broker supplies all position prices and also performs trade execution without any other review
Explanation
Separating NAV calculation and risk oversight from the people who generate returns limits the incentive to misprice positions and hide risk. The other options combine functions that should be independent, such as valuation with portfolio management or trading with finance.
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