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Exam 26: Hedge Funds

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Question 21

Multiple Choice

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Assume that you manage a $2 million portfolio that pays no dividends and has a beta of 1.25 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1,300. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250) .

A) selling 1
B) selling 8
C) buying 1
D) buying 8
E) selling 6

F) A) and D)
G) A) and B)

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Question 22

Multiple Choice

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A hedge fund sets its fee at 2% and a 20% carry with an 8% benchmark. How much money will a hedge fun make in fees over the course of a year if AUM started at $1,000,000 and ended the year at 1,120,000?

A) $8,000
B) $22,400
C) $30,400
D) $38,000

E) All of the above
F) C) and D)

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Question 23

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A hedge fund sets its fee at 2% and a 20% carry with an 8% benchmark. How much money will a hedge fun make in fees over the course of a year if AUM started at $4,000,000 and ended the year at 5,300,000?

Hedge fund performance may reflect significant compensation for ________ risk.

Shares in hedge funds are priced

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration. A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

A bet on particular mispricing across two or more securities with extraneous sources of risk, such as general market exposure hedged away, is a

Hedge funds are prohibited from investing or engaging in

A hedge fund pursuing a ______ strategy is attempting to exploit temporary misalignments in relative pricing.

An example of a ______ strategy is the mispricing of a futures contract that must be corrected by contract expiration.

If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds, a hedge fund pursuing a relative value strategy would

A ________ is an investment fraud in which a manager collects funds from clients, claims to invest those funds on their behalf, and reports extremely favorable investment returns, but in fact uses the funds for his or her own use.

Assume newly-issued 30-year on-the-run bonds sell at higher yields (lower prices) than 29½-year bonds with a nearly identical duration. A hedge fund that sells 29½-year bonds and buys 30-year bonds is taking a

Alpha-seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

Assume that you manage a $2 million portfolio that pays no dividends and has a beta of 1.3 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1,500. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250) .

Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds.

If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds, a hedge fund pursuing a relative value strategy would

______ bias arises when the returns of unsuccessful funds are left out of the sample.

______ are subject to the Securities Act of 1933 and the Investment Company Act of 1940 to protect unsophisticated investors.