Exam 20: Hedge Funds

You pay $216,000 to the Capital Hedge Fund, which has a price of $18 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?

Which of the following are characteristics of a hedge fund? I. Pooling of assets II. Strict regulatory oversight by the SEC III. Investing in equities, debt instruments, and derivative instruments IV. Professional management of assets

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the exercise price on the incentive fee?

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 annual return on this fund?

Hedge funds are typically set up as ________.

A(n) ________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to ________ for every $100 in net assets and increase the long position to ________ of net assets.

To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called ________.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the Black-Scholes value of the call option on the management incentive fee?

A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees ________.

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%. The 1-year oil futures price should be equal to ________.

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

As of 2017, hedge funds had approximately ________ under management.

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. How many S&P 500 contracts do you need to sell to hedge your portfolio?

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ________.

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. Hedging this portfolio by selling S&P 500 futures contracts is an example of ________.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ________.

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

According to a model that was estimated using monthly excess returns over a 5 year period, ending in October of 2014, average returns of equity hedge funds are ________ the S&P 500 Index.

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