Chapter 31 CAIA Flashcards - Due Diligence of Fund Managers
Due Diligence
Due diligence consists of seven parts: structure, strategy, administrative, performance, risk, legal, and references.
Key Personnel Clause
A key personnel clause is a provision that allows investors to withdraw their assets from the fund, immediately and without penalty, when the identified key personnel are no longer making investment decisions for the fund.
Master Trust
The master trust is the legal structure used to invest the assets of both onshore investors and offshore investors in a consistent if not identical manner, so that both funds share the benefit of the fund manager’s insights. Investors access the master trust through feeder funds.
Feeder Trust
A feeder fund is a legal structure through which investors have access to the investment performance of the master trust.
Side Pocket
In a side pocket arrangement, illiquid investments held by a hedge fund are segregated from the rest of the portfolio. Assets may be placed in a side pocket because they are difficult to value.
League Table
Common in many industries, a league table is a listing of organizations, generated by a research or media firm, that ranks organizations by size, volume, or other indicators of activity. Small or unknown service providers may not have the scale or experience to adequately serve a fund manager.
Shorting Volatility
Shorting Volatility is a strategy whereby a fund manager sells call or put options, especially out-of-the-money options, without an offsetting position. If the options expire unexercised, the fund manager receives the option premiums, and the return for the fund is enhanced. Short volatility positions can generate consistently high historical returns over periods of relatively calm financial markets, but if the market moves sharply, the short option positions rapidly increase in value, causing substantial losses for investors.
Fund Style index
A fund style index is a collection of fund managers operating with a similar strategy to the fund manager in question that can be used as a benchmark.
Herd Behavior
There is also a danger of herd behavior, also known as the bandwagon effect in psychology. Herd behavior is the extent to which people are overly eager to adopt beliefs that conform to those of their peers.
Blind Spot Bias
Leading these biases is the bias blind spot, which is people’s tendency to underestimate the extent to which they possess biases.
Lockup Period
A lockup period is a provision preventing, or providing financial disincentives for, redemption or withdrawal of an investor’s funds for a designated period, typically one to three years for hedge funds, and up to ten years or more for real estate and private equity funds.
Omega Score
The omega-score is a measure of future risk that is computed as a function of a fund’s age, size, past performance, volatility, and fee structure.
