Explanation:
A cornerstone of hedge fund due diligence is ensuring that the risk management function operates independently from the portfolio managers or trading desk. This independence removes conflicts of interest. The independent oversight can be conducted internally by a dedicated chief risk officer/team, or outsourced to a specialized, independent risk service provider. Option A is incorrect because disparate systems for internal risk monitoring and external reporting can obscure the true risk profile and create a transparency gap. Option C is incorrect because multi-strategy funds employ various distinct strategies, each fundamentally requiring different, rather than equivalent, levels of liquidity and leverage. Option D is incorrect because an investor must verify fund terms and operational facts independently using third parties (like administrators, auditors, and prime brokers) rather than relying solely on the fund manager as the source of information.
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A
Investors should confirm that portfolio managers and traders use an effective system to monitor risk regardless of whether this system is separate from the one used to report risk to investors.
B
Investors should be certain that the fund has adopted an independent risk management function regardless of whether this function is carried out by dedicated risk managers at the fund or by a risk service provider.
C
Investors should make sure that all portfolio managers use equivalent levels of liquidity and leverage, which are consistent with the terms set by the fund's risk plan, and maintain these levels over time.
D
Investors should acknowledge that the terms of the fund are unique to the hedge fund being considered for investment, and therefore, the fund should be the only source of information regarding the terms applied.