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

An allocator is reviewing a hedge fund's reported track record before an on-site visit. Which step is most appropriate as part of verifying the reported performance history?

The most appropriate step is reconciling reported monthly returns to administrator statements and prime broker records. These are independent third-party sources, so they verify accuracy, whereas marketing sheets, internal memos or benchmark comparisons do not confirm that the reported numbers are correct.

  1. AAccepting the fund's marketing tear sheet because it is signed by the portfolio manager
  2. BReconciling monthly returns to administrator-prepared statements and prime broker recordsCorrect
  3. CComparing reported returns only with the fund's own stated benchmark
  4. DRelying on the fund's internal valuation memo without third-party confirmation

Explanation

Independent verification of track record means tying reported returns to third-party records such as the administrator and prime broker. Self-prepared marketing materials or internal memos are not independent evidence, and benchmark comparison tests relative performance, not accuracy.

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