Skip to content

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

An investor reviews a fund with USD 500 million reported assets. The fund's administrator confirms NAV only from manager-supplied prices. Of the portfolio, 60% is in Level 3 illiquid positions valued internally by the portfolio manager, who earns a 20% performance fee. Which conclusion is most appropriate?

Valuation risk is high. USD 300 million, 60% of assets, is valued internally by the manager who earns a 20% performance fee, creating a conflict of interest. The administrator only uses manager prices, so there is no independent check; an independent valuation policy and review are required.

  1. AValuation risk is low because an administrator is engaged
  2. BValuation risk is high because the manager controls the pricing of USD 300 million of assets and benefits from higher marks, so independent valuation policy and review are neededCorrect
  3. CValuation risk is low because performance fees align interests
  4. DValuation risk is only relevant if the fund suffers redemptions

Explanation

60% of USD 500 million is USD 300 million valued by the party paid on performance, a clear conflict. The administrator merely relays manager prices and provides no independent check. Performance fees give an incentive to inflate marks, so independent valuation committee procedures are needed.

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