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
An institutional investor is selecting between two bond funds. Fund A has higher yield but Fund B has better liquidity-adjusted returns. In an adverse market scenario, which consideration should take priority for a pension fund with near-term liabilities?
Answer: Liquidity management to meet liability obligations
Pension funds with near-term liabilities must prioritize liquidity to ensure they can meet obligations, making liquidity-adjusted returns more important than raw yield.
Which regulatory filing would a due diligence analyst review to identify a U.S. registered fund's largest portfolio holdings on a quarterly basis?
Answer: Form N-Q or N-PORT
Form N-PORT (formerly N-Q) is filed quarterly by registered investment companies and discloses complete portfolio holdings with position-level detail.
During due diligence, you discover a fund manager's personal trading account shows patterns that precede fund trades. This most likely indicates:
Answer: Front-running, a serious violation of fiduciary duty
Trading in a personal account ahead of client trades is front-running, which violates fiduciary duty and securities laws by profiting at clients' expense.
What does a high 'autocorrelation' in monthly hedge fund returns typically suggest to a due diligence analyst?
Answer: Returns may be smoothed or illiquid assets may be stale-priced
High autocorrelation in returns often signals that a fund is holding illiquid assets that are priced infrequently, making reported returns appear artificially smooth.
In fund selection, a 'clawback provision' in a private equity fund's limited partnership agreement primarily protects:
Answer: Limited partners from paying performance fees on returns that are later reversed
A clawback requires the GP to return previously paid carried interest if subsequent losses bring cumulative returns below the preferred return threshold.
When assessing a fund's risk management framework, which document best reveals the internal governance structure for approving risk limit breaches?
Answer: Risk governance policy and escalation procedures
A fund's risk governance policy defines who has authority to approve exceptions to risk limits, how breaches are escalated, and what remediation actions are required.
A fund of funds allocates to 15 underlying managers. Which scenario most undermines the diversification benefit of this structure?
Answer: High positive correlation among underlying managers' strategies
If underlying managers are highly correlated, the fund of funds provides little true diversification and investors bear multiple layers of fees for concentrated risk.