Topic 8: Due Diligence and Selecting Managers

Question 1

What is foregone loss carry forward

Answer 1

E.g. in high water mark scenario where fees are not paid.

Question 2

What is the information coefficient?

Answer 2

correlation between a manager’s forecasted asset returns and ACTUAL RETURNS of those assets.

Question 3

How did investment advisers use quant to detect returns that may reflect manipulation?

Answer 3

1. Bias ratio
2. Serial correlation
3. Skewness

Question 4

Three essential questions for risk review

Answer 4

1. Types of levels of risks
2. How are the risks measured
3. How are the risks managed

Question 5

Level 2 Assets are valued based on

Answer 5

non-active market prices, active market prices for similar assets, or non-quoted prices based on observable, corroborated inputs

Question 6

Bias ratio

Answer 6

detects valuation bias or deliberate price manipulation

Question 7

Meta Risk

Answer 7

Meta risks are qualitative risks beyond measurable financial risks.

Question 8

What is a drawback of a separate account hedge fund structure

Answer 8

Not providing limited liability to investors. Investors are responsible for covering all losses, including those associated with using margins or derivatives.