Free CAIA Level II Due Diligence and Selecting Managers Practice Questions

D is correct. Quantitative due diligence involves analyzing the statistical properties of a fund's return stream, including return distribution, Sharpe ratio, drawdowns, correlation to benchmarks, and other risk-adjusted metrics, to assess whether the performance record is consistent with the stated strategy.
Choice A is incorrect because regulatory registration review falls under operational or compliance DD, not quantitative DD.
Choice B is incorrect because back-office systems and technology infrastructure are elements of operational DD.
Choice C is incorrect because investment DD (including quantitative analysis) and operational DD typically proceed in parallel, not sequentially with one gating the other.

D is correct. A use-of-name clause prohibits the GP from identifying or referencing the LP—by name, logo, or affiliation—in fundraising materials, investor presentations, press releases, or reference lists without the LP's explicit prior consent. This is particularly important for institutional investors with reputational or regulatory sensitivities.
Choice B is incorrect because restrictions on investing in the LP's securities would appear in a conflict-of-interest policy or LPA amendment, not a use-of-name clause.
Choice C is incorrect because regulatory performance reporting is governed by compliance obligations and is unrelated to use-of-name restrictions.
Choice A is incorrect because LP interest transfer restrictions are governed by the LPA's transfer provisions, not use-of-name clauses.

D is correct. Volatility of volatility refers to the variability of volatility itself — that is, how much realized volatility fluctuates over time. This is directly relevant to funds that have short volatility or short variance exposures (selling variance swaps, VIX futures, or variance options). A fund that sells variance at a fixed strike profits when realized variance is low and stable, but suffers convex losses when realized variance spikes unexpectedly. High vol-of-vol means there is a significant probability of a volatility regime shift that moves far beyond the level implied by historical averages. In due diligence, assessing a short-vol manager's exposure to vol-of-vol — and whether their risk models account for regime changes — is essential to understanding the true tail risk of the strategy.
Choice A is incorrect because comparing reported VaR to position-level data is a portfolio risk review or valuation consistency check, not specifically a vol-of-vol consideration.
Choice C is incorrect because duration risk and interest rate sensitivity in fixed income portfolios are not primarily a vol-of-vol issue. Duration estimation is affected by yield curve shape and convexity, not by the variability of rates' own volatility.
Choice B is incorrect because tracking error and active share analysis in long-only equity management involves return dispersion relative to a benchmark, not the second-order dynamics of volatility. This is a benchmarking and portfolio construction question, not a vol-of-vol question.