Learning Module 6 Hedge Funds

Which statement best captures the primary distinction between hedge funds and mutual funds?

A manager runs a portfolio that buys undervalued equities and shorts overvalued equities, targeting a net beta near zero. Which strategy description fits best?

Which of these is an example of an event-driven hedge fund trade?

A hedge fund uses leverage to buy convertible bonds and shorts the issuer's equity to hedge delta. Which risk is most prominent for this strategy?

Which fund structure is most appropriate for a large institutional investor who wants customized tax treatment and operational control while retaining daily transparency?

Which of the following best explains why hedge fund indices can overstate net performance of the universe?

An investor is concerned about redemption pressure in a fund-of-funds during market stress. What is the primary economic effect of this concern?

Which fee arrangement is commonly used to align manager and investor interests and sometimes limits collection of incentive fees until high-water marks are surpassed?

Which strategy type historically relies most on capturing short-term pricing differences within and across credit instruments and may employ significant leverage?

A fund manager aims to profit from long-term global interest rate shifts by trading government bond futures and currency forwards. Which category best fits this approach?

Which of the following is NOT a typical distinguishing characteristic of hedge funds relative to traditional investment vehicles?

A manager runs a long-biased equity fund that primarily seeks stocks with high projected earnings growth while holding a smaller short book. Which risk metric is most likely to capture the relation of return to volatility for this strategy?

Which hedge fund strategy is most likely to be long-biased and to benefit most during periods of high corporate transaction activity?

What is a typical reason an investor would choose a fund-of-funds over direct selection of individual hedge funds?

Which operational arrangement gives an investor the most direct legal ownership of the underlying assets while retaining manager execution?

A hedge fund uses many concentrated long positions and sizable leverage to amplify returns. Which risk factor should an investor particularly evaluate during due diligence?

Which of the following best describes 'strategy beta' as applied to hedge funds?

If an investor wants to minimize counterparty credit risk associated with prime brokers while keeping access to hedge fund strategies, which option offers more direct control over counterparty selection?

Which of the following best explains why hedge funds may be attractive as a bond substitute in some institutional portfolios?

Which of the following best describes a primary reason managers use leverage in hedge fund strategies?

Which of the following is a typical structural feature used to allow US taxable and offshore tax-exempt investors to invest together efficiently?

Which of the following best characterizes a downside of funds-of-funds?

An activist hedge fund accumulates a large equity position and seeks board seats to force divestiture of non-core assets to unlock value. Which description applies best?

Which reporting or operational practice should an institutional investor prioritize to detect potential fraud risk in a hedge fund?

During a period when equity correlations across stocks rise sharply and markets trend uniformly higher, which hedge fund style is most likely to struggle?

An investor evaluates two funds: Fund A reports gross annualized return of 12 percent before fees; Fund B reports net annualized return of 9 percent after 2 percent management fee and 20 percent performance fee. If Fund A charged 'two and twenty' and achieved the same gross return, what would be Fund A's net return after fees (assuming performance fee applied to returns above 0 and no hurdle)? Use simple fee calculation on a 100 initial principal.

Which of the following best explains survivorship bias in hedge fund indices?

Which statement is most accurate about hedge fund regulation and disclosure compared with mutual funds?

Which of the following is the most plausible rationale for institutional investors to negotiate lower fees than 'two and twenty'?

Which hedge fund strategy historically exhibited negative correlation with long-only equity markets and served as a diversifier during equity rallies?

Which of the following is an operational benefit of having a master fund receiving capital from multiple feeders?

A hedge fund uses a high proportion of illiquid private loans in its portfolio but offers monthly redemptions with short notice. Which mismatch risk is most concerning?

Which type of hedge fund investment style is best accessed via CTAs (commodity trading advisers) and trend-following models?

Which scenario most clearly indicates the presence of selection bias in a hedge fund database?

Which hedge fund strategy is most likely to be negatively correlated with a broad equity index in the short run and often used to provide crisis alpha?

Which of the following best describes backfill bias in hedge fund databases?

Which of these is a core reason hedge funds may be attractive in constructing a multi-asset portfolio?

Which factor most directly increases the governance and reporting requirements hedge fund investors should insist upon after the 2008 financial crisis and other industry failures?

A multi-strategy hedge fund allocates capital dynamically across pods that each run different strategies. What is a primary advantage of this approach?

Which of the following is the most accurate statement about hedge fund alpha?

Which of the following best explains why some hedge funds impose a lockup period upon initial investment?

Which of the following is an advantage of a fund of one structure relative to a commingled fund?

Which statement most accurately reflects hedge funds' historical performance behavior relative to stocks and bonds from 1990 to 2014?

Which of the following statements about hedge fund side letters is most accurate?

What is a common motivation for an investor to invest in a hedge fund replication ETF instead of direct hedge fund investments?

Which of the following best explains why managers sometimes prefer using derivatives rather than cash securities in implementing hedge fund strategies?

If an institutional investor's primary objective is minimizing manager selection risk while gaining exposure to many hedge fund strategies with modest minimums, which product is most appropriate?

Which of the following best summarizes the trade-off an investor faces when choosing between direct hedge fund investments and hedge fund replication ETFs?

Which risk is specifically associated with hedge funds that rely heavily on prime brokers and central counterparties?

Which of the following sets of due diligence items should an investor prioritize before allocating capital to a hedge fund manager?