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

During background checks on a hedge fund manager, an investor finds that the CV lists a senior role at a prior firm, but the prior firm confirms only a one-year analyst position. What is the most appropriate response by the due diligence team?

The team should treat the falsified credential as a serious integrity red flag, demand an explanation and normally stop the process. Honesty about background cannot be offset by strong returns, and independent verification outweighs manager-supplied references. Merely reducing the allocation leaves the underlying character risk unaddressed.

  1. AAccept the discrepancy if the fund's returns have been strong
  2. BTreat it as a serious integrity red flag, seek explanation, and consider halting the investment processCorrect
  3. CReduce the allocation size but otherwise proceed unchanged
  4. DRely on the manager's reference list instead of the prior firm

Explanation

Misrepresentation of credentials goes to the manager's integrity, which cannot be offset by performance. Verified facts must be independently confirmed, and a material falsification usually ends the process. Sizing down does not address the character risk.

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