Exam 20: Hedge Funds

Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .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 ________.

Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. How many shares did you purchase?

In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ________ that are ________ than their average returns in other months.

Hedge fund managers are compensated by ________.

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 a .1% incentive bonus. What was the management cost for the year?

Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

If a long-short hedge fund were banned by government regulation from short selling, which statement would no longer be true?

An example of a neutral pure play is ________.

Hedge funds can invest in various investment options that are not generally available to mutual funds. These include: I. Futures and options II. Merger arbitrage III. Currency contracts IV. Companies undergoing Chapter 11 restructuring and reorganization

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits?

The difference between market-neutral and long-short hedges is that market-neutral hedge funds ________.

Convertible arbitrage hedge funds ________.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio?

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is ________.

Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of ________.

Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. If the share price after 3 years increases to $15.28, what is the value of your investment?

Some argue that abnormally high returns of hedge funds are tainted by ________, which arises when unsuccessful funds cease operations, leaving only successful ones.

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

Management fees for hedge funds typically range between ________ and ________.

Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund?