Due Diligence & Fund Selection Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Due Diligence & Fund Selection flashcards as text
During operational due diligence, which document most directly reveals how a fund handles cash movements between investor accounts and trading accounts?
Answer: Cash management policy
A fund's cash management policy details the controls and procedures governing how cash is moved between accounts, a key operational risk area.
A fund manager claims a 3-year track record but recently replaced the lead portfolio manager. How should a due diligence analyst treat this performance history?
Answer: Discount it since strategy continuity may be broken
When key personnel change, past performance may not reflect future management style, so the track record should be discounted or contextualized accordingly.
Which metric best measures a fund manager's ability to add value relative to the risk taken, specifically adjusting for systematic market exposure?
Answer: Jensen's alpha
Jensen's alpha measures excess return above what is predicted by the CAPM given the fund's beta, isolating manager skill from market risk.
In fund selection, what is the primary purpose of reviewing a fund's Form ADV Part 2?
Answer: To understand fees, conflicts of interest, and investment strategies
Form ADV Part 2 is the investment adviser's disclosure brochure covering strategies, fees, disciplinary history, and conflicts of interest.
A fund's Sharpe ratio improves from 0.6 to 1.2 after a methodology change in return smoothing. What concern does this raise?
Answer: Return smoothing may be artificially reducing reported volatility
Return smoothing can suppress reported volatility, inflating the Sharpe ratio and masking true underlying risk in illiquid or opaque portfolios.
Which of the following best describes 'style drift' in fund due diligence?
Answer: A fund deviating from its stated investment mandate or strategy
Style drift occurs when a fund manager deviates from the stated investment style or mandate, potentially altering the risk-return profile investors expected.
When evaluating a hedge fund's prime brokerage relationship during due diligence, why is counterparty credit quality important?
Answer: Assets held at a failing prime broker may be at risk of loss or freeze
If a prime broker fails, as seen in the Lehman Brothers collapse, fund assets may be frozen or lost, representing significant counterparty risk.