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Answer: The firm should ensure that the hedge fund allows direct, in-person communications with the fund's senior management and key decision makers.
The correct answer is A. Investors should make sure they have access to the people at the top of the firm; the actual risk takers and decision makers, so that they have a better sense of what is really going on at that firm. Direct access to founders or senior management is preferred as part of continuing due diligence but if they are not available then the fund should strive to communicate with managers who perform day-to-day investment tasks at the fund. Communication with investor relations is not sufficient. B is incorrect because many funds employ independent service providers to provide technology, perform valuations, report risks to investors, etc. but these firms do not and should not get involved in managing and monitoring the funds' risks. C is incorrect. Investors should evaluate the considered fund's current and historical leverage figures but also understand how and why these figures might deviate from the fund's peers. D is incorrect. While it is important to know what percentage of a fund's assets are exchange traded and marked to market via exchange prices versus model prices or broker quotes, the acceptable percentage would depend on the strategy of the fund.
Author: LeetQuiz Editorial Team
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When assessing the risk management process of a potential hedge fund investment, what specific criteria should a due diligence specialist at an asset management firm deem suitable for their evaluation?
A
The firm should ensure that the hedge fund allows direct, in-person communications with the fund's senior management and key decision makers.
B
Following today's best practices, the fund should employ independent service providers that will play essential roles in managing and monitoring its risks.
C
Leverage is a key criterion and the firm should not consider investing in the fund unless the fund's gross leverage ratio is above the peer group average.
D
It is crucial to assess the fund's valuation policy, and if more than 10% of asset prices are marked to model, rather than marked to market, the firm should not invest in the fund.