Question 1

Hedge fund strategies can be classified as

Accepted Answer

A)  directional or nondirectional. 
B)  stock or bond. 
C)  arbitrage or speculation. 
D)  stock or bond and arbitrage or speculation. 
E)  directional or nondirectional and stock or bond. 
A)  directional or nondirectional. 
B)  stock or bond. 
C)  arbitrage or speculation. 
D)  stock or bond and arbitrage or speculation. 
E)  directional or nondirectional and stock or bond. A

Question 2

Market neutral bets can result in ______ volatility because hedge funds use ______.

Accepted Answer

A)  very low; hedging techniques to eliminate risk 
B)  low; risk management techniques to reduce risk 
C)  considerable; risk management techniques to reduce risk 
D)  considerable; considerable leverage 
A)  very low; hedging techniques to eliminate risk 
B)  low; risk management techniques to reduce risk 
C)  considerable; risk management techniques to reduce risk 
D)  considerable; considerable leverage D

Question 3

______ bias arises because hedge funds only report returns to database publishers if they want to.

Accepted Answer

A)  Survivorship 
B)  Backfill 
C)  Omission 
D)  Incubation 
E)  None of the options are correct. 
A)  Survivorship 
B)  Backfill 
C)  Omission 
D)  Incubation 
E)  None of the options are correct. B

Question 4

Performance evaluation of hedge funds is complicated by

Accepted Answer

A)  liquidity premiums. 
B)  survivorship bias. 
C)  unreliable market valuations of infrequently-traded assets. 
D)  merger arbitrage. 
E)  All of the options are correct. 
A)  liquidity premiums. 
B)  survivorship bias. 
C)  unreliable market valuations of infrequently-traded assets. 
D)  merger arbitrage. 
E)  All of the options are correct.

Question 5

______ must periodically provide the public with information on portfolio composition.

Accepted Answer

A)  Hedge funds 
B)  Mutual funds 
C)  ADRs 
D)  Hedge funds and ADRs 
E)  Hedge funds and mutual funds 
A)  Hedge funds 
B)  Mutual funds 
C)  ADRs 
D)  Hedge funds and ADRs 
E)  Hedge funds and mutual funds

Question 6

Hedge fund incentive fees are essentially

Accepted Answer

A)  put options on the portfolio with a strike price equal to the current portfolio value. 
B)  put options on the portfolio with a strike price equal to the expected future portfolio value. 
C)  call options on the portfolio with a strike price equal to the expected future portfolio value. 
D)  call options on the portfolio with a strike price equal to the current portfolio value times one plus the benchmark return. 
E)  straddles. 
A)  put options on the portfolio with a strike price equal to the current portfolio value. 
B)  put options on the portfolio with a strike price equal to the expected future portfolio value. 
C)  call options on the portfolio with a strike price equal to the expected future portfolio value. 
D)  call options on the portfolio with a strike price equal to the current portfolio value times one plus the benchmark return. 
E)  straddles.

Question 7

Sadka (2010) shows that exposure to unexpected declines in ________ is an important determinant of average hedge fund returns, and that the spreads in average returns across funds with the highest and lowest ________ may be as much as 6% annually.

Accepted Answer

A)  market risk; systematic risk 
B)  market liquidity; liquidity risk 
C)  unsystematic risk; unique risk 
D)  default risk; default risk 
A)  market risk; systematic risk 
B)  market liquidity; liquidity risk 
C)  unsystematic risk; unique risk 
D)  default risk; default risk

Question 8

______ uses quantitative techniques, and often automated trading systems, to seek out many temporary misalignments among securities.

Accepted Answer

A)  Covered interest arbitrage 
B)  Locational arbitrage 
C)  Triangular arbitrage 
D)  Statistical arbitrage 
E)  All arbitrage 
A)  Covered interest arbitrage 
B)  Locational arbitrage 
C)  Triangular arbitrage 
D)  Statistical arbitrage 
E)  All arbitrage

Question 9

Statistical arbitrage is a version of a ______ strategy.

Accepted Answer

A)  market neutral 
B)  directional 
C)  relative value 
D)  divergence 
E)  convergence 
A)  market neutral 
B)  directional 
C)  relative value 
D)  divergence 
E)  convergence

Question 10

________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.

Accepted Answer

A)  Data mining 
B)  Pairs trading 
C)  Alpha transfer 
D)  Beta shifting 
A)  Data mining 
B)  Pairs trading 
C)  Alpha transfer 
D)  Beta shifting

Question 11

Like mutual funds, hedge funds

Accepted Answer

A)  allow private investors to pool assets to be managed by a fund manager. 
B)  are commonly organized as private partnerships. 
C)  are subject to extensive SEC regulations. 
D)  are typically only open to wealthy or institutional investors. 
E)  are commonly organized as private partnerships and are typically only open to wealthy or institutional investors. 
A)  allow private investors to pool assets to be managed by a fund manager. 
B)  are commonly organized as private partnerships. 
C)  are subject to extensive SEC regulations. 
D)  are typically only open to wealthy or institutional investors. 
E)  are commonly organized as private partnerships and are typically only open to wealthy or institutional investors.

Question 12

Hedge funds often have ______ provisions as long as ______, which preclude redemption.

Accepted Answer

A)  crackdown; 2 months 
B)  lock-up; 2 months 
C)  crackdown; several years 
D)  lock-up; several years 
E)  None of the options are correct. 
A)  crackdown; 2 months 
B)  lock-up; 2 months 
C)  crackdown; several years 
D)  lock-up; several years 
E)  None of the options are correct.

Question 13

Hedge funds traditionally have ______ than 100 investors and ______ to the general public.

Accepted Answer

A)  more; advertise 
B)  more; do not advertise 
C)  less; advertise 
D)  less; do not advertise 
A)  more; advertise 
B)  more; do not advertise 
C)  less; advertise 
D)  less; do not advertise

Question 14

Assume that you manage a $3 million portfolio that pays no dividends and has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1,220. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

Accepted Answer

A)  selling 1 
B)  selling 14 
C)  buying 1 
D)  buying 14 
E)  selling 6 
A)  selling 1 
B)  selling 14 
C)  buying 1 
D)  buying 14 
E)  selling 6

Question 15

A hedge fund pursuing a ______ strategy is betting one sector of the economy will outperform other sectors.

Accepted Answer

A)  directional 
B)  nondirectional 
C)  stock or bond 
D)  arbitrage or speculation 
E)  None of the options are correct. 
A)  directional 
B)  nondirectional 
C)  stock or bond 
D)  arbitrage or speculation 
E)  None of the options are correct.

Question 16

Regarding hedge fund incentive fees, hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.

Accepted Answer

A)  get nothing; get nothing 
B)  refund the fee; get the fee 
C)  get the fee; lose nothing except the incentive fee 
D)  get the fee; lose the management fee 
E)  None of the options are correct. 
A)  get nothing; get nothing 
B)  refund the fee; get the fee 
C)  get the fee; lose nothing except the incentive fee 
D)  get the fee; lose the management fee 
E)  None of the options are correct.

Question 17

Pairs trading is associated with

Accepted Answer

A)  triangular arbitrage. 
B)  statistical arbitrage. 
C)  data mining. 
D)  triangular arbitrage and data mining. 
E)  statistical arbitrage and data mining. 
A)  triangular arbitrage. 
B)  statistical arbitrage. 
C)  data mining. 
D)  triangular arbitrage and data mining. 
E)  statistical arbitrage and data mining.

Question 18

A hedge fund sets its fee at 2% and a 20% carry with an 8% benchmark. How much money will a hedge fun make in fees over the course of a year if AUM started at $2,000,000 and ended the year at 2,300,000?

Accepted Answer

A)  $68,300 
B)  $74,000 
C)  $80,400 
D)  $92,040 
A)  $68,300 
B)  $74,000 
C)  $80,400 
D)  $92,040

Question 19

Hedge funds ______ engage in market timing ______ take extensive derivative positions.

Accepted Answer

A)  cannot; and cannot 
B)  cannot; but can 
C)  can; and can 
D)  can; but cannot 
E)  None of the options are correct. 
A)  cannot; and cannot 
B)  cannot; but can 
C)  can; and can 
D)  can; but cannot 
E)  None of the options are correct.

Question 20

Hedge funds differ from mutual funds in terms of

Accepted Answer

A)  transparency. 
B)  investors. 
C)  investment strategy. 
D)  liquidity. 
E)  All of the options are correct. 
A)  transparency. 
B)  investors. 
C)  investment strategy. 
D)  liquidity. 
E)  All of the options are correct.

Exam 26: Hedge Funds

Hedge fund strategies can be classified as

Market neutral bets can result in ______ volatility because hedge funds use ______.

______ bias arises because hedge funds only report returns to database publishers if they want to.

Performance evaluation of hedge funds is complicated by

______ must periodically provide the public with information on portfolio composition.

Hedge fund incentive fees are essentially

Sadka (2010) shows that exposure to unexpected declines in ________ is an important determinant of average hedge fund returns, and that the spreads in average returns across funds with the highest and lowest ________ may be as much as 6% annually.

______ uses quantitative techniques, and often automated trading systems, to seek out many temporary misalignments among securities.

Statistical arbitrage is a version of a ______ strategy.

________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.

Like mutual funds, hedge funds

Hedge funds often have ______ provisions as long as ______, which preclude redemption.

Hedge funds traditionally have ______ than 100 investors and ______ to the general public.

A hedge fund pursuing a ______ strategy is betting one sector of the economy will outperform other sectors.

Regarding hedge fund incentive fees, hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.

Pairs trading is associated with

A hedge fund sets its fee at 2% and a 20% carry with an 8% benchmark. How much money will a hedge fun make in fees over the course of a year if AUM started at $2,000,000 and ended the year at 2,300,000?

Hedge funds ______ engage in market timing ______ take extensive derivative positions.

Hedge funds differ from mutual funds in terms of

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Market neutral bets can result in volatility because hedge funds use .

Sadka (2010) shows that exposure to unexpected declines in is an important determinant of average hedge fund returns, and that the spreads in average returns across funds with the highest and lowest may be as much as 6% annually.

Hedge funds often have provisions as long as , which preclude redemption.

Hedge funds traditionally have than 100 investors and to the general public.

Regarding hedge fund incentive fees, hedge fund managers if the portfolio return is very large and if the portfolio return is negative.

Hedge funds engage in market timing take extensive derivative positions.