Skip to content

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

An investor is evaluating a hedge fund and wants to separate the due diligence work into its two broad components. Which pairing correctly describes the split commonly used in hedge fund due diligence frameworks?

Investment due diligence evaluates the strategy, the manager's edge, risk management and track record, while operational due diligence evaluates service providers, internal controls, valuation practices and legal structure. Both are completed before investing, and they address different sources of potential loss.

  1. AInvestment due diligence assesses strategy, edge, risk management and track record; operational due diligence assesses service providers, controls, valuation and legal structureCorrect
  2. BInvestment due diligence assesses administrators and auditors; operational due diligence assesses the manager's alpha and drawdowns
  3. CInvestment due diligence covers only fee terms; operational due diligence covers only performance attribution
  4. DInvestment due diligence is performed after funding; operational due diligence is performed before funding

Explanation

Investment due diligence examines what the manager does and whether it can generate returns (strategy, process, risk, track record). Operational due diligence examines the infrastructure that protects assets (administrator, auditor, valuation, controls, legal). The other options swap or distort these roles and timing.

Did you get it right without looking?

One question tells you little. A timed set on Performing Due Diligence on Specific Managers and Funds shows your real accuracy, how long you take and where you lose marks.

Practise Performing Due Diligence on Specific Managers and FundsFree diagnostic mock

More Performing Due Diligence on Specific Managers and Funds questions