Question 1

Hedge funds are prohibited from investing or engaging in

Accepted Answer

A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) None of the options are correct. 
A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) None of the options are correct.

Question 2

A hedge fund pursuing a ______ strategy is trying to exploit relative mispricing within a market but is hedged to avoid taking a stance on the direction of the broad market.

Accepted Answer

A) directional 
B) nondirectional 
C) market neutral 
D) arbitrage or speculation 
E) nondirectional and market neutral 
A) directional 
B) nondirectional 
C) market neutral 
D) arbitrage or speculation 
E) nondirectional and market neutral

Question 3

A hedge fund attempting to profit from a change in the spread between mortgages and Treasuries is using a ______ strategy.

Accepted Answer

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

Question 4

The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a

Accepted Answer

A) benchmark. 
B) water stain. 
C) water mark. 
D) high water mark. 
A) benchmark. 
B) water stain. 
C) water mark. 
D) high water mark.

Question 5

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 
A) cannot; and cannot 
B) cannot; but can 
C) can; and can 
D) can; but cannot

Question 6

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

Accepted Answer

A) limited liability partnerships; minimal 
B) limited liability partnerships; extensive 
C) investment trusts; minimal 
D) investment trusts; extensive 
A) limited liability partnerships; minimal 
B) limited liability partnerships; extensive 
C) investment trusts; minimal 
D) investment trusts; extensive

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

Hedge fund performance may reflect significant compensation for ________ risk.

Accepted Answer

A) liquidity 
B) systematic 
C) unsystematic 
D) default 
A) liquidity 
B) systematic 
C) unsystematic 
D) default

Question 9

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 
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

Question 10

Hedge funds may invest or engage in

Accepted Answer

A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) All of the options are correct. 
A) distressed firms. 
B) convertible bonds. 
C) currency speculation. 
D) merger arbitrage. 
E) All of the options are correct.

Question 11

______ bias arises when the returns of unsuccessful funds are left out of the sample.

Accepted Answer

A) Survivorship 
B) Backfill 
C) Omission 
D) Incubation 
A) Survivorship 
B) Backfill 
C) Omission 
D) Incubation

Question 12

______ are the dominant form of investing in securities markets for most individuals, but ______ have enjoyed a far greater growth rate in the last decade.

Accepted Answer

A) Hedge Funds; hedge funds 
B) Mutual funds; hedge funds 
C) Hedge Funds; mutual funds 
D) Mutual funds; mutual funds 
A) Hedge Funds; hedge funds 
B) Mutual funds; hedge funds 
C) Hedge Funds; mutual funds 
D) Mutual funds; mutual funds

Question 13

Alpha-seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

Accepted Answer

A) bet on; bet on 
B) hedge; hedge 
C) hedge; bet on 
D) bet on; hedge 
A) bet on; bet on 
B) hedge; hedge 
C) hedge; bet on 
D) bet on; hedge

Question 14

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. 
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.

Question 15

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 
A) crackdown; 2 months 
B) lock-up; 2 months 
C) crackdown; several years 
D) lock-up; several years

Question 16

Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.

Accepted Answer

A) more; more 
B) more; less 
C) less; less 
D) less; more 
A) more; more 
B) more; less 
C) less; less 
D) less; more

Question 17

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

Question 18

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

Question 19

______ 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 
A) Covered interest arbitrage 
B) Locational arbitrage 
C) Triangular arbitrage 
D) Statistical arbitrage

Question 20

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.

Exam 26: Hedge Funds

Hedge funds are prohibited from investing or engaging in

A hedge fund pursuing a ______ strategy is trying to exploit relative mispricing within a market but is hedged to avoid taking a stance on the direction of the broad market.

A hedge fund attempting to profit from a change in the spread between mortgages and Treasuries is using a ______ strategy.

The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a

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

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

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 fund performance may reflect significant compensation for ________ risk.

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

Hedge funds may invest or engage in

______ bias arises when the returns of unsuccessful funds are left out of the sample.

______ are the dominant form of investing in securities markets for most individuals, but ______ have enjoyed a far greater growth rate in the last decade.

Alpha-seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

Like mutual funds, hedge funds

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

Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.

Hedge fund strategies can be classified as

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

Performance evaluation of hedge funds is complicated by

The Investment Environment

Financial Markets, 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

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural 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

Hedge funds engage in market timing take extensive derivative positions.

Hedge funds are typically set up as and provide information about portfolio composition and strategy to their investors.

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.

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

are the dominant form of investing in securities markets for most individuals, but have enjoyed a far greater growth rate in the last decade.

Alpha-seeking hedge funds typically relative mispricing of specific securities and broad market exposure.

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

Hedge funds are transparent than mutual funds because of strict SEC regulation on hedge funds.