Which of the following asset classes is NOT traded on an exchange?
A) Closed-End Mutual Funds
B) ETF's
C) Hedge Funds
D) REIT's
C) Hedge Funds
Portable alpha refers to a hedge fund strategy that ...
A)... adds derivatives to a portfolio such that the resulting market beta is equal to one.
B)... transfers risk from one hedge fund to another in the same fund family.
C)... aims to minimise idiosyncratic risk.
D)... allows investors to separate alpha from market risk.
D)... allows investors to separate alpha from market risk.
A short sale __
A) means that you are not actually selling the security
B) is only allowed for hedge funds
C) is only allowed for mutual funds
D) allows investors to profit from a decline in the price of a security
D) allows investors to profit from a decline in the price of a security
Hedge funds often have a lockup period. What is a good economic reason for hedge funds to introduce such lockup periods?
A) They reduce the survorship bias
B) They reduce agency costs
C) They reduce liquidity problems
D) They lead to higher incentive fees
C) They reduce liquidity problems
A hedge fund that charges an incentive fee on all profits each year that exceed a stated benchmark, is said to have a ...
A)... positive alpha
B)... both hurdle rate and high water mark (as they are synonymous for hedge funds)
C)... hurdle rate
D)... high water mark
D)... high water mark
The backfill bias in hedge fund performance evaluation...
A)... means that we cannot see the past performance of funds that are currently in the database.
B)... that past returns of hedge funds are not their actual returns.
C)... refers to the practice that funds pretend to have a long history of returns even when they just started.
D)... means that we mostly see the historical returns of succesful funds.
D)... means that we mostly see the historical returns of succesful funds.
A hedge fund was valued at $400 million at the end of last year. At this year's end the value before fees was $500 million. The fund charges "2-and20" fees. Management fees are calculated on end-of-year values. Incentive fees are independent of management fees and calculated using no hurdle rate. The annualized net return is closest to:
A) 18%
B) 5%
C) 25%
D) 3%
A) 18%
Management fee = 2% of the end-of-year value: 2%*500M= 10 million
Incentive fee:
Profit = 500 - 400 = 100
100*20% = 20 million
Total fees: 20 + 10 = 30 million
Value after fees: 500 - 30 = 470 million
Return: (470-400)/400 = 0.175
Which of the following hedge fund positions is directional rather than nondirectional?
A. Buying undervalued corporate bonds and shorting Treasuries to exploit yield spread misalignment.
B. Buying ExxonMobil and shorting Chevron to isolate relative mispricing.
C. Buying a distressed firm expected to be acquired at a premium during a merger.
D. Buying convertible bonds and shorting the underlying stock to hedge equity exposure.
C. Buying a distressed firm expected to be acquired at a premium during a merger.
Even though market-neutral hedge fund strategies hedge systematic risk, they often exhibit high return volatility primarily because:
A. They are exposed to residual beta due to incomplete hedging.
B. They use substantial leverage to magnify small mispricing opportunities.
C. The mispricing exploited is always linked to unstable macroeconomic variables.
D. Hedged portfolios tend to have unpredictable correlations with Treasury yields.
B. They use substantial leverage to magnify small mispricing opportunities.