CFM Fund Administration & Operations 4 ā Questions and Answers
Question 1: In a fund of funds structure, what is 'double layering of fees' and why is it a concern for investors?
- Paying both a front-end load and a back-end load to the same fund
- Paying management and performance fees at both the fund of funds level and the underlying fund level, compounding the fee burden (Correct answer)
- Being charged fees in both the domestic and offshore share classes
- Paying advisory fees to both the custodian and the administrator
Correct answer: Paying management and performance fees at both the fund of funds level and the underlying fund level, compounding the fee burden
Fund of funds investors bear the fees of the fund of funds manager plus the fees of each underlying fund, significantly eroding net returns compared to direct fund investment.
Question 2: What is the primary function of a fund's 'compliance calendar' in daily operations?
- To schedule investor reporting dates
- To track regulatory filing deadlines, portfolio restriction tests, and required disclosures to ensure timely compliance (Correct answer)
- To plan the annual audit schedule
- To monitor the fund manager's trading activity
Correct answer: To track regulatory filing deadlines, portfolio restriction tests, and required disclosures to ensure timely compliance
A compliance calendar centralizes all regulatory deadlines, portfolio constraint monitoring dates, and required reporting obligations to prevent violations from missed deadlines.
Question 3: Under FATCA, what obligation does a foreign fund administrator have when dealing with U.S. investors?
- Withhold 30% of all payments to U.S. investors regardless of classification
- Identify and report U.S. account holders to the IRS or local tax authority under an IGA (Correct answer)
- Exclude U.S. investors from the fund entirely
- File quarterly tax returns with the IRS for each U.S. investor
Correct answer: Identify and report U.S. account holders to the IRS or local tax authority under an IGA
Under FATCA, Foreign Financial Institutions (FFIs) must identify U.S. account holders and report their account information to the IRS, either directly or through their local government under an Intergovernmental Agreement (IGA).
Question 4: A hedge fund's high-water mark stands at $110 per share. The current NAV falls to $90. Which statement is correct regarding performance fees?
- Performance fees accrue on any gain above $90
- No performance fees are earned until NAV exceeds $110 per share (Correct answer)
- Performance fees are refunded to investors to compensate for the loss
- The high-water mark resets to $90 automatically
Correct answer: No performance fees are earned until NAV exceeds $110 per share
The high-water mark ensures the manager earns performance fees only after recovering all previous losses; the NAV must exceed $110 before any incentive fee is charged.
Question 5: Which of the following is a key operational consideration when a fund transitions from one administrator to another?
- Notifying the SEC 30 days in advance is mandatory for all fund types
- Ensuring complete and accurate transfer of all historical records, positions, and investor data (Correct answer)
- Requiring all investors to re-sign their subscription agreements
- Suspending NAV calculation during the transition period
Correct answer: Ensuring complete and accurate transfer of all historical records, positions, and investor data
A clean data migrationāincluding historical NAV records, investor registers, position history, and tax informationāis the most critical operational requirement in an administrator transition.
Question 6: What is the role of an 'independent valuation agent' in hedge fund operations?
- To audit the fund's financial statements annually
- To provide third-party pricing for complex, illiquid, or hard-to-value securities (Correct answer)
- To approve the fund's investment decisions
- To calculate and certify the management fee
Correct answer: To provide third-party pricing for complex, illiquid, or hard-to-value securities
An independent valuation agent provides objective, third-party pricing for Level 2 and Level 3 assets where market prices are unavailable or unreliable, reducing conflicts of interest.
Question 7: In U.S. registered fund operations, what is 'revenue sharing' in the context of fund distribution?
- The fund distributing its investment income to shareholders
- Payments made by the fund or its adviser to broker-dealers in exchange for preferred shelf space or sales support (Correct answer)
- Sharing expense ratios between multiple share classes
- Splitting performance fees between the portfolio manager and risk team
Correct answer: Payments made by the fund or its adviser to broker-dealers in exchange for preferred shelf space or sales support
Revenue sharing involves payments from the fund complex or adviser to distribution intermediaries as compensation for platform access, sales support, or marketing, raising conflict-of-interest concerns.
CFM Fund Administration & Operations 4
In a fund of funds structure, what is 'double layering of fees' and why is it a concern for investors?