CMFAS M8 Risks of Collective Investment Schemes question: key-person dependence creates

CMFAS M8Risks of Collective Investment Schemes

A boutique fund's returns depend heavily on a single star manager. The greatest danger this key-person dependence creates is that:

A The fund is guaranteed to outperform for as long as the manager stays
B The manager's departure or illness could hurt returns and trigger redemptions
C The fund must convert into a passive index tracker if the manager leaves
D The fund's market risk is removed because the manager can time the market

Show the answer and explanation

Answer: B. The manager's departure or illness could hurt returns and trigger redemptions

Key-person risk is a specific form of manager risk: because success depends on one star manager or small team, their departure, illness or change of approach can hurt performance and trigger redemptions.

Common mistake

Treating reliance on a star manager as a strength rather than a concentration of manager risk.

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CMFAS M8 Risks of Collective Investment Schemes question: key-person dependence creates

Answer: B. The manager's departure or illness could hurt returns and trigger redemptions

Common mistake

Related CMFAS M8 questions

CMFAS M8 Risks of Collective Investment Schemes question: key-person dependence creates

Answer: B. The manager's departure or illness could hurt returns and trigger redemptions

Common mistake

Related CMFAS M8 questions