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

Which feature of a hedge fund's board of directors most strongly supports effective governance for offshore fund investors?

A majority of directors independent of the manager, who actively oversee valuation and service providers, is the strongest governance feature. Independence allows real challenge on conflicts and pricing, whereas boards of manager employees, relatives or ones meeting only on request offer little protection to investors.

  1. ADirectors who are employees of the investment manager and sit on several of its funds
  2. BA majority of directors independent of the manager, with documented oversight of valuation and service providersCorrect
  3. CA board that meets only when the manager requests
  4. DA board composed solely of the fund's founders and their relatives

Explanation

Independence from the manager lets directors challenge valuation, fees and conflicts and oversee administrators and auditors. Manager-affiliated or founder-dominated boards provide no meaningful check.

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