Risk management, valuation, disclosure and investor protection
What this domain tests
The controls that justify permitting leverage, and the disclosures that let investors police it.
Risk management
- Documented framework covering leverage limits, counterparty/broker exposure, concentration, liquidity and stress testing, with daily monitoring of gross and net exposure against the 2x cap.
- Segregation of front office, risk and operations; independent price verification; pre-agreed escalation and de-leveraging triggers.
Valuation
- Listed securities and derivatives are valued mark-to-market; unlisted positions follow a written valuation policy, with independent valuation where required.
- NAV per unit is computed after fees and accruals, so leverage and illiquid positions are not hidden in stale prices.
Disclosure and investor protection
- PPM states strategy, leverage policy, risk factors, fees, conflicts and grievance redressal.
- Periodic investor reporting covers portfolio, exposure, leverage, performance and material changes.
- No assured or guaranteed returns; private placement only; maximum 1000 investors per scheme; minimum Rs 1 crore commitment.
- Grievances through the manager and SCORES; exit options on material adverse PPM changes.
Worked example
NAV Rs 200 crore with gross exposure Rs 380 crore (1.9x). A stress test shows a 10% adverse move in the long book leaving NAV near Rs 180 crore while exposure stays Rs 380 crore → 2.1x, a breach caused by NAV falling, not by new trades. The pre-agreed trigger requires de-leveraging to 1.8x, i.e. gross exposure of about Rs 324 crore. Leverage must therefore be tested against NAV continuously.
Traps
Believing leverage is measured only when a trade is done; valuing derivatives at cost; forgetting that a falling NAV itself consumes leverage headroom; assuming stress testing is optional for unleveraged periods.