FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds
During due diligence on a long/short equity manager, the analyst finds that the fund's gross positions can be liquidated, at 20% of average daily volume, as follows: 50% of the portfolio within 1 day, 30% within 5 days, and the remaining 20% within 20 days. The fund offers monthly liquidity to investors with 30 days' notice. Which conclusion is best supported?
Asset liquidity is well aligned with the redemption terms. The entire portfolio can be liquidated within 20 days, which is inside the 30-day notice period, so even a full redemption could be funded without forced sales at distressed prices.
- ALiquidity mismatch is a concern because 20% of the portfolio needs 20 days to liquidate
- BThe fund's asset liquidity is well aligned with its redemption terms, since the whole portfolio can be liquidated within the 30-day notice periodCorrect
- CThe fund is illiquid because only 50% can be sold within one day
- DLiquidity cannot be assessed without knowing the fund's leverage
Explanation
The slowest position takes 20 days, which is shorter than the 30-day notice period. Even full liquidation can therefore be done before the redemption date, so asset and liability liquidity are aligned. The 20-day tail alone does not create a mismatch, and the one-day figure is not the relevant comparison.
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