Exam 17: Hedge Funds

Assuming positive basis and negligible borrowing cost, which of the following set of transactions could yield positive arbitrage profits a hedge fund might pursue?

A ________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges 3% management fee on assets. The fee is imposed on year end asset values. What is the end of year NAV for the fund?

A one-year oil futures contract is selling for $74.50. Spot oil prices are $68 and the one-year risk free rate is 3.25%. Using the one-year oil futures price, the arbitrage profit implied is ________.

Hedge funds managers are compensated by ________.

Which of the following are not managed investment companies?

Typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

Hedge funds that change strategies and types of securities invested and also vary the proportions of assets and invested in particular market sectors according to the fund manager's outlook are called ________.

Advantages of hedge funds include all but which one of the following?

If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio net asset value is S₀ and a hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving ________ call(s) with exercise price ________.

Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 index was up 16.5% during the same period. The gross return on assets is 21% and the expense ratio is 2%. For each 1% above the benchmark return the fund managers receive 0.1% incentive bonus. What was the management cost for the year?

The incentive fee of hedge funds is typically ________ but can be higher.

Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 index was up 16.5% during the same period. The gross return on assets is 21% and the expense ratio is 2%. For each 1% above the benchmark return the fund managers receive 0.1% incentive bonus. Using the management cost calculated, what was the annual return on this fund?

Portfolio A has a beta of 0.2 and an expected return of 14%. Portfolio B has a beta of 0.5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a long/short equity fund and wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio ________ and a long position in portfolio ________.

The fastest growing category of hedge funds is feeder funds. These funds invest in ________.

________ are private partnerships of small number of wealthy investors who are organised as private partnerships, often subject to lock-up period and allowed to pursue a wide range of investment activities.

You pay $216 000 to the Capital Hedge Fund which has a price of $18.00 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund's expense ratio is 2% and is deducted from year end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

________ may effectively partake in any investment strategy and may act opportunistically as conditions evolve.

Convertible arbitrage hedge funds ________.

Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio ________ and a long position in portfolio ________.