FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
Which reporting line for the risk manager of a hedge fund best preserves independence and helps manage conflicts of interest?
The risk manager should report to the CEO or a board-level risk committee, with compensation independent of trading profits. This gives the authority to challenge portfolio managers, whereas reporting to portfolio management, marketing or a prime broker compromises independence.
- AReporting solely to the head portfolio manager
- BReporting to the head of marketing and investor relations
- CReporting to the CEO or board-level risk committee, independent of portfolio management compensationCorrect
- DReporting to the prime broker's relationship manager
Explanation
A risk manager reporting to senior management or a board committee, with pay not tied to trading profits, can challenge portfolio managers. Reporting to portfolio managers or marketing subordinates risk to return generation or fundraising.
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