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

When an allocator conducts reference checks as part of manager due diligence, which approach is most effective?

The most effective approach combines references the manager supplies with independently identified ones, such as former employees, prime brokers and investors who redeemed, and then compares their accounts. Manager-chosen references are biased, and an audited record does not reveal integrity or conduct concerns.

  1. ASpeak only with references supplied by the manager, since they know the firm best
  2. BRely on the manager's marketing materials describing past investors' satisfaction
  3. CContact a mix of supplied and independently identified references, including former employees, prime brokers and departed investors, and compare their accountsCorrect
  4. DSkip references when the audited track record is clean

Explanation

Manager-supplied references are selected to be favorable. Back-channel and independent sources such as former staff, counterparties and exited investors can reveal issues in conduct, turnover and reasons for leaving. Audits do not capture integrity or behavior concerns.

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