Skip to content

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

In structuring a due diligence process for hedge fund selection, which of the following best describes the relationship between quantitative analysis and operational due diligence?

Both quantitative and operational due diligence are needed. Strong performance statistics do not rule out weak controls or fraud, while sound operations do not make a strategy appropriate or its returns attractive. Each addresses a different failure mode and both should be completed before capital is committed.

  1. AOperational due diligence is optional if the quantitative analysis shows strong risk-adjusted returns
  2. BQuantitative analysis is unnecessary if operational due diligence is satisfactory
  3. CBoth are needed, because strong performance statistics do not rule out operational weaknesses, and good operations do not guarantee an acceptable investment strategyCorrect
  4. DOperational due diligence should be done only after the investment has been made, to monitor ongoing risk

Explanation

Investment due diligence assesses strategy, risk and performance, while operational due diligence assesses controls, service providers, valuation and legal structure. Each addresses different failure modes, and a fund may fail on either dimension. Skipping one, or deferring operational review until after investing, leaves risks unassessed at the time capital is committed.

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