Due Diligence of Fund Managers

Question 1

1. List the seven parts of a complete due diligence process.

Answer 1

• Structure
• Strategy
• Administrative
• Performance
• Risk
• Legal
• References

Question 2

2. What are the three fundamental screening questions regarding an investment process?

Answer 2

• What is the investment objective of the fund?
• What is the investment process of the fund manager?
• What is the nature and source of any value added by the fund manager?

Question 3

3. What is the distinction between information gathering and information filtering?

Answer 3

• Information gathering indicates the ability of the manager to create access to information or to have access to better information than other managers. Information filtering is the fund manager’s ability to use data available to others but to be better able to glean tradable insights from it.

Question 4

4. What is the purpose of viewing a league table in a review of outside service providers?

Answer 4

• The purpose of viewing a league table in review of a funds outside service providers is to independently verify the reputation and suitability of the fund manager’s outside service providers. League tables are ranked listings of organizations.

Question 5

5. Which of the following types of actions should be reviewed in an administrative review: civil, criminal, and regulatory actions?

Answer 5

• All three type of actions (civil, criminal and regulatory actions) should be reviewed in an administrative review.

Question 6

6. How does gaming relate to a historical performance review?

Answer 6

• The performance review is an analysis of past investment results that forms the heart of many due diligence reports. The due diligence review should ascertain whether financial performance has been gamed. Gaming in this context is investment activity that is driven by a desire to generate favorable measures of performance rather than truly enhanced performance. An example would be smoothing of returns that masks true volatility levels.

Question 7

7. List the three important questions in a risk management review.

Answer 7

• What are the types and levels of risk involved in the fund manager’s strategy?
• What risks are measured, monitored, and managed?
• How are risks measured, monitored, and managed?

Question 8

8. What are the functions of a chief risk officer?

Answer 8

• The chief risk officer (CRO) oversees the fund manager’s program for identifying, measuring, monitoring, and managing risk.

Question 9

9. What is the distinction between a hard lockup period and a soft lockup period?

Answer 9

• In a hard lockup period, withdrawals are contractually not allowed for the entire duration of the lockup period. In a soft lockup period, investors may be allowed to withdraw capital from the fund before the expiration of the lockup period, but only after the payment of a redemption fee, which is frequently 1% to 5% of the withdrawal amount.

Question 10

10. What does the omega-score attempt to measure?

Answer 10

• The omega-score attempts to measure the failure risk for a fund.