CAIA - 33 - Hedge Fund Operational Due Diligence Flashcards Preview

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Flashcards in CAIA - 33 - Hedge Fund Operational Due Diligence Deck (53)
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1

Hedge Funds typically differ from private equity in 2 primary ways with regards to operational due diligence:

 

1. ___ ___

2. ___ ___

Hedge Funds typically differ from private equity in 2 primary ways with regards to operational due diligence:

 

1. Frequent trading

2. Liquid positions

2

___ refers to the process of completing a securities trade.

Execution refers to the process of completing a securities trade.

3

It is best practice to keep investment and trading activities ___.

It is best practice to keep investment and trading activities separate.

 

(To reduce conflicts of interest)

4

Trading software systems create ___ ___, which are records of trades made in a trading day.

Trading software systems create trade blotters, which are records of trades made in a trading day.

5

___ refers to the process of logging trades internally at a fund either through order management or fund accounting systems

Posting refers to the process of logging trades internally at a fund either through order management or fund accounting systems

6

___ refers to the process of reconciling third-party trade confirmations for executed trades with the firm's internal systems and trade blotters, and transferring the cash and securities to complete the trade.

Settlement refers to the process of reconciling third-party trade confirmations for executed trades with the firm's internal systems and trade blotters, and transferring the cash and securities to complete the trade.

7

The allocation most commonly used is ___ ___allocation, which allocates shares based on preset proportionate amounts.

The allocation most commonly used is pro rata allocation, which allocates shares based on preset proportionate amounts.

8

___ refers to the process of a hedge fund conducting an internal review to ensure that the trade's internal details are consistent with those provided by the fund's counterparties.

Reconciliation refers to the process of a hedge fund conducting an internal review to ensure that the trade's internal details are consistent with those provided by the fund's counterparties.

9

Most reconciliations are ___-___. However, best practice to perform ___-___reconciliations with a ___ ___ ___.

Most reconciliations are two-way. However, best practice to perform three-way reconciliations with a third party administrator.

10

A ___ ___is the failure of a trade to execute.

trade break is the failure of a trade to execute.

11

Regarding the frequency of reconciliations, the best practice is to conduct reconciliations ___.

Regarding the frequency of reconciliations, the best practice is to conduct reconciliations daily.

12

Liquid securities are generally reconciled on a ___ basis.

Liquid securities are generally reconciled on a T+1 basis.

13

During the ODD review, investors examine operational risks in each step in the trade life cycle. There are 2 key areas of focus:

 

1. Independent oversight of ___ ___

2. Independent oversight of ___ ___

During the ODD review, investors examine operational risks in each step in the trade life cycle. There are 2 key areas of focus:

 

1. Independent oversight of internal departments

2. Independent oversight of third parties

14

What are the 4 reasons hedge funds hold cash:

 

1. ___

2. ___

3. ___ ___ ___

4. ___

What are the 4 reasons hedge funds hold cash:

 

1. Expenses

2. Trading

3. Investor Cash Flow

4. Unencumbered

15

Paying expenses should require ___ of ___and oversight by a ___ ___ ___.

Paying expenses should require separation of duties and oversight by a third party administrator.

16

Cash balances from trading should be ___ ___instead of ___a ___with the counterparty.

Cash balances from trading should be swept frequently instead of leaving balance with the counterparty.

17

___ ___is cash that is not currently being used for trading.

Unencumbered cash is cash that is not currently being used for trading.

18

___ ___ ___ ___ are institutions that facilitate trading for hedge funds by aggregating some or all of their cash and securities, and provide services such as ___ and ___ ___.

Hedge fund prime brokers are institutions that facilitate trading for hedge funds by aggregating some or all of their cash and securities, and provide services such as leverage and short selling.

19

During the hedge fund operational due diligence process, investors should evaluate a prime brokers ___ as well as its ___. Investors should also see if the hedge fund ___its hedge broker exposure.

During the hedge fund operational due diligence process, investors should evaluate a prime brokers operations as well as its solvency. Investors should also see if the hedge fund diversifies its hedge broker exposure.

20

In contrast to private equity funds, hedge funds typically use third-party fund administrators that perform two key functions: ___ ___ and ___ ___.

In contrast to private equity funds, hedge funds typically use third-party fund administrators that perform two key functions: fund accounting and shareholder services.

21

For valuation of securities, the best practice is for hedge funds to give TPAs the ___ of valuation committee meetings.

For valuation of securities, the best practice is for hedge funds to give TPAs the minutes of valuation committee meetings.

22

Delays in NAV production have an ___ ___ ___, since they may represent operational issues between the hedge fund and the administrator.

Delays in NAV production have an operational signaling effect, since they may represent operational issues between the hedge fund and the administrator.

23

When verifying operational data, ODD should verify ___and ___ with third parties.

When verifying operational data, ODD should verify assets and positions with third parties.

24

There are three areas typically overseen by a hedge fund's compliance department:

 

1. ___ ___

2. ___ ___

3. Monitoring and managing ___of ___

There are three areas typically overseen by a hedge fund's compliance department:

 

1. Personnel training

2. Testing implementation

3. Monitoring and managing conflicts of interest

25

An indication of poor operational oversight of personal account dealings is ___ ___, which involves placing trades for personal accounts before the firm.

An indication of poor operational oversight of personal account dealings is front running, which involves placing trades for personal accounts before the firm.

26

Employees who want to execute trades for their personal accounts must submit ___-___requests and engage in a ___-___process.

Employees who want to execute trades for their personal accounts must submit pre-clearance requests and engage in a post-clearance process.

27

A company with material nonpublic information about a security places the security on a ___ ___, and prohibits employees form trading any securities on the list.

A company with material nonpublic information about a security places the security on a restricted list, and prohibits employees form trading any securities on the list.

28

Hedge funds may override minimum holding periods with a ___ ___that permits the employees to sell a security at a loss if it will prevent the employees from suffering significant losses.

Hedge funds may override minimum holding periods with a hardship exemption that permits the employees to sell a security at a loss if it will prevent the employees from suffering significant losses.

29

___ ___refers to employees using matrial non-public information (MNPI) when making investments.

Insider trading refers to employees using matrial non-public information (MNPI) when making investments.

30

___ ___are made up of professionals and academics who serve as consultants to hedge funds. Compliance should monitor interaction with experts to make sure MNPI is not acted on.

Expert networks are made up of professionals and academics who serve as consultants to hedge funds. Compliance should monitor interaction with experts to make sure MNPI is not acted on.

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