CFM Fund Administration & Operations 2 — Questions and Answers
Question 1: Which document serves as the primary legal contract between a hedge fund and its investors, outlining rights, fees, and redemption terms?
- Prospectus
- Limited Partnership Agreement (Correct answer)
- Side Letter
- Subscription Agreement
Correct answer: Limited Partnership Agreement
The Limited Partnership Agreement is the foundational legal document governing the relationship between the general partner and limited partners in a hedge fund.
Question 2: A fund administrator performs a 'shadow NAV' calculation. What is the primary purpose of this process?
- To estimate future fund performance
- To independently verify the manager's NAV calculation (Correct answer)
- To calculate performance fees owed to the manager
- To report NAV to regulators
Correct answer: To independently verify the manager's NAV calculation
Shadow NAV allows the administrator to independently cross-check the investment manager's own NAV calculation, providing an important control against errors or fraud.
Question 3: Under U.S. regulations, which entity is generally required to register as a transfer agent for a mutual fund?
- The fund's investment adviser
- The fund's custodian bank
- The entity that maintains shareholder records and processes transactions (Correct answer)
- The fund's prime broker
Correct answer: The entity that maintains shareholder records and processes transactions
Transfer agents, which maintain shareholder records, process purchases and redemptions, and handle distributions, must register with the SEC under the Securities Exchange Act of 1934.
Question 4: What is a 'gate provision' in a hedge fund limited partnership agreement?
- A minimum investment threshold for new investors
- A restriction limiting the total redemptions processed in a given period (Correct answer)
- A fee charged for early redemption
- A lock-up period applied to new subscriptions
Correct answer: A restriction limiting the total redemptions processed in a given period
A gate provision allows a fund manager to limit redemptions in any given period—often expressed as a percentage of NAV—to protect remaining investors from forced asset liquidations.
Question 5: In fund operations, what does 'T+1 settlement' mean for a mutual fund redemption?
- The investor must submit the redemption request one day before the NAV date
- The fund receives payment one day after the trade date
- The investor receives redemption proceeds one business day after the trade date (Correct answer)
- The fund must hold assets for one day before selling
Correct answer: The investor receives redemption proceeds one business day after the trade date
T+1 settlement means the investor receives their redemption proceeds one business day after the trade date on which their redemption was processed.
Question 6: Which of the following best describes the role of a 'paying agent' in a fund structure?
- An entity that pays management fees to the fund manager
- An entity responsible for distributing dividends and other payments to shareholders (Correct answer)
- A bank that lends money to the fund for leverage
- An administrator that calculates fund expenses
Correct answer: An entity responsible for distributing dividends and other payments to shareholders
A paying agent handles the actual disbursement of dividends, interest, and redemption proceeds to shareholders or beneficial owners on behalf of the fund.
Question 7: What is the purpose of a 'reconciliation' process in daily fund operations?
- To match fund holdings and cash balances across multiple records to identify and resolve discrepancies (Correct answer)
- To allocate gains and losses among fund investors
- To calculate the management fee accrual
- To confirm the fund's compliance with investment guidelines
Correct answer: To match fund holdings and cash balances across multiple records to identify and resolve discrepancies
Reconciliation compares records from the custodian, prime broker, and administrator to ensure all holdings and cash balances agree, catching errors before NAV is published.
CFM Fund Administration & Operations 2
Which document serves as the primary legal contract between a hedge fund and its investors, outlining rights, fees, and redemption terms?