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

An investor is conducting operational due diligence on a new hedge fund manager. The manager's marketing deck states that the fund's administrator, auditor and prime broker are all well-known firms. Which of the following steps would be the most reliable way to confirm the manager's claims about its service providers?

The most reliable step is to contact the administrator, auditor and prime broker directly to verify the engagement, scope of work and any changes. Representations from the manager or brand reputation are not independent evidence, so they cannot substitute for third-party confirmation.

  1. AAccept the names listed in the offering memorandum since they are legally binding
  2. BContact the service providers directly to verify the engagement, scope of services and any recent changesCorrect
  3. CAsk the manager to provide a signed statement that the providers are in good standing
  4. DRely on the reputation of the service providers' brand names as evidence of quality

Explanation

Independent verification directly with the service providers confirms that the relationships exist, what services are actually performed, and whether anything has changed. Statements by the manager or brand reputation are not independent evidence, and offering documents only reflect what the manager asserts.

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