Kingpin804

Hedge funds operating in the United States that abide by certain guidelines:

A) can utilize certain hedging strategies.

B) may advertise to “accredited” investors.

C) gain exemption from most SEC regulations.

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Hedge funds may not engage in advertising of any kind. Hedge funds may or may not utilize hedging strategies. The main reason for hedge funds to organize under section 3(c)(1) is to gain exemption from most SEC regulations.

Kingpin804

Managers of hedge funds are typically compensated by:

A) an incentive fee, paid only if performance exceeds a “high water mark”.

B) a management fee, based on the net change in value of the assets during the year.

C) a base management fee, based on the value of assets under management, plus an incentive fee, based on profits.

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Typical arrangements pay the manager a base fee, usually around 1% of assets, plus an incentive fee proportional to profits.

Kingpin804

To avoid most SEC regulations, hedge funds organized in the United States typically operate within all of the following guidelines EXCEPT hedge:

A) funds may accept a maximum number of investors.

B) fund investments by individuals are limited to a maximum of $500,000.

C) fund managers are prohibited from advertising or marketing the fund.

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Hedge funds organized under section 3(c) (7) of the Investment Company Act may not advertise, must limit the number of investors to 500, and may only accept “qualified” investors, as defined by the Act. Hedge funds investments are not subject to a maximum amount.

Kingpin804

Which of the following statements describing hedge funds is least accurate? Most hedge funds:

A) use hedging techniques to reduce risk.

B) are exempt from most securities regulations.

C) are available to only a limited number of qualified investors.

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The term “hedge fund” is an inaccurate description of the investment class because these funds may or may not employ hedging techniques. Most hedge funds are organized so as to remain exempt from most securities regulations. Participation typically requires a large minimum investment and is limited to small numbers of qualified investors.

Kingpin804

A hedge fund that takes perfectly offsetting long and short positions is best described as a(n):

A) long/short fund.

B) market-neutral fund.

C) event-driven fund.

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Market-neutral funds take long and short positions but attempt to offset them to hedge against market moves. Long/short funds take both long and short positions but do not try to offset them. Event-driven funds focus on unique market opportunities, not offsetting positions.

Kingpin804

The largest category of hedge funds in terms of asset size is:

A) market-neutral funds.

B) long/short funds.

C) global macro funds.

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Long/short funds are considered to be the “traditional” type of hedge funds, and they represent the largest category of hedge funds.

Kingpin804

Which of the following statements best describes the fund-of-funds (FOF) class of hedge funds? A fund of funds:

A) is an open-end mutual fund that primarily invests in other open-end funds.

B) is open to institutional investors for the purpose of seeking arbitrage situations in hedge fund pricing.

C) allows smaller investors to access the hedge funds market.

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A FOF is a fund that invests in hedge funds. They are open to both individual and institutional investors.

Kingpin804

Which of the following two statements, in combination, about the benefits and drawbacks of fund of funds investing, when compared to investing in individual hedge funds, is most accurate?

Benefit of Fund of Funds

Drawback of Fund of Funds

A) Provide returns that, on a risk-adjusted basis, are superior to investing in individual funds. Only open to investors with significant capital.

B) Enable investors with limited capital to invest in a portfolio of hedge funds. On a risk-adjusted basis, net-of-fees performance may be lower than that of individual funds.

C) May grant investors access to highly sought-after closed funds. Greater time and effort spent on due diligence by the fund of funds investor.

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Fund of funds enable investors with limited capital to invest in a portfolio of hedge funds. Usually, a portfolio of hedge funds will decrease the total variability of the returns of the funds comprising the portfolio. Because a fund of funds structure adds an additional layer of management fees, the actual returns may be lower than the returns that investors could achieve by selecting and investing in individual funds themselves. A benefit of fund of funds investing is that the fund of funds manager performs due diligence on the hedge funds in which the fund invests.

Kingpin804

One of the main advantages to investing in a fund of funds (FOF) is that compared to investing in a single hedge fund, FOFs provide:

A) improved diversification of assets.

B) higher expected returns.

C) lower management fees.

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FOFs have higher management fees than single hedge funds because the FOF will charge a fee in addition to the fee charged by the hedge fund manager. FOFs actually have lower expected returns because of the cost of their increased diversification. FOFs can diversify across many hedge funds strategies to decrease risk.

Kingpin804

Which of the following is least likely considered a benefit of the fund-of-funds hedge fund structure?

A) The fund-of-funds manager has the expertise needed to evaluate and conduct due diligence on individual hedge funds.

B) A fund of funds may have access to hedge funds that are closed to new investors.

C) Similar to index funds, a fund of funds charges investors lower fees than individual hedge funds.

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Funds of hedge funds charge investors a management fee in addition to the fees charged by each hedge fund manager. This double layer of fees is the primary drawback of a fund of funds. The other choices are likely benefits of fund-of-funds investing.