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

An investor is reviewing a hedge fund manager's marketing materials. The fund reports a 5-year track record with annualized return of 11% and no down year. Which step is most important for assessing whether the track record is a reliable guide to future performance?

The most important step is confirming that the same team, strategy and comparable asset base produced the track record that will manage the new capital. Without that continuity, historical returns say little about future results, however attractive they look.

  1. AConfirm the returns were generated by the same team, strategy and asset base that will manage the investor's capitalCorrect
  2. BCompare the reported return only with the risk-free rate
  3. CRely on the manager's own description of the strategy without checking records
  4. DFocus only on the most recent 12 months of performance

Explanation

A track record is informative only if the people, process and strategy that produced it are still in place. Changes in team, strategy or fund size reduce its relevance. Other options ignore this continuity or rely on unverified, too-short data.

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