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

Which statement about operational due diligence (ODD) on a hedge fund is most accurate?

ODD assesses non-investment risks such as governance, internal controls, service providers, valuation and compliance, and operational failures are a major cause of hedge fund collapse. Strong performance does not replace it, and it must be independent and go beyond reading the offering memorandum.

  1. AODD is unnecessary if the fund has strong investment performance and a reputable strategy
  2. BODD focuses on non-investment risks such as governance, controls, service providers, valuation and compliance, and operational failures are a major cause of hedge fund failuresCorrect
  3. CODD should be performed only by the portfolio manager's own team to protect confidentiality
  4. DODD is complete once the offering memorandum has been read

Explanation

ODD assesses risks outside the investment process, including service providers, controls, valuation and compliance, and operational failures account for a large share of fund failures. Strong performance does not remove operational risk, independence is required, and the offering document is only one input.

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