FRM Part II · FRM Exam Part II · Madoff: A Riot of Red Flags
Which practice would most effectively address the risk that a feeder fund cannot verify the existence of the master fund's assets?
The most effective step is requiring an independent custodian and administrator that directly confirm positions and trades. This places verification outside the manager's control, unlike marketing materials, affiliated audits or self-reported ratios.
- ARequiring an independent third-party custodian and administrator, with direct confirmation of positions and tradesCorrect
- BRequesting more frequent marketing presentations from the manager
- CAccepting audited statements prepared by the manager's affiliate
- DRelying on the manager's reported Sharpe ratio
Explanation
Independent custody and administration with direct confirmations give evidence of asset existence outside the manager's control. Presentations, affiliated audits and self-reported ratios all depend on the manager and so offer no independent verification.
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