AIM 2: Compare hedge funds with mutual funds.

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

A) gain exemption from most SEC regulations. 

B) may advertise to “accredited” investors.

C) can utilize certain hedging strategies. 

D) avoid restrictions on making macroeconomic bets.

The correct answer is A

Hedge funds may not engage in advertising of any kind. Hedge funds may or may not utilize hedging strategies. Hedge funds may make macroeconomic bets, but this is not because of their agreement to adhere to certain guidelines. The main reason for hedge funds to organize under section 3 (c) (1) is to gain exemption from most SEC regulations.

2、Which of the following statements regarding the difference between hedge funds and mutual funds is TRUE?

A) Hedge funds have fewer restrictions on short selling securities compared to mutual funds.

B) While anyone can invest in mutual funds, qualified hedge fund investors must have a net worth of $1 million.

C) Unlike hedge funds, mutual funds are unable to use leverage.

D) Mutual funds tend to hold fewer securities than hedge funds.

The correct answer is A

Hedge funds have no constraints on short selling. The other statements are all incorrect. Hedge fund portfolios are more concentrated, which implies that they tend to hold fewer securities. Mutual funds are able to use leverage, but the application of leverage is limited. Qualified hedge fund investors must have a net worth of $5 million.

3、Which of the following statements concerning comparisons between hedge funds and mutual funds is most accurate?

A) Hedge funds tend to spread their holdings across more securities than mutual funds.

B) Mutual funds tend to invest according to a specific investment approach while hedge funds do not.

C) Mutual funds are restricted from using any leverage in their portfolios, while hedge funds use leverage extensively.

D) Hedge funds cannot advertise in order to solicit new funds, while mutual funds can make advertisements to the general public.

The correct answer is D

Hedge funds are private investment vehicles for qualified investors. Being private allows the hedge fund to escape regulatory oversight, but means the hedge fund cannot advertise to attract new funds. In contrast, mutual funds can advertise to the general public. Note that the other statements are false. Hedge fund portfolios tend to be more concentrated than mutual funds, both hedge funds and mutual funds tend to invest according to a specific approach, and both hedge funds and mutual funds are permitted to use leverage, although mutual funds are typically limited in the amount of leverage they can use (i.e., up to 33% of net assets).

AIM 3: Analyze the implications the incentive structure of hedge funds have on the risk and performance of the funds.

1、Which of the following statements is true concerning the compensation paid to a fund manager? A fee based upon:

A) profits is asymmetric and is the usual fee structure for hedge funds. 

B) profits earned is symmetric and is the usual fee structure for hedge funds. 

C) assets under management is asymmetric and the usual fee structure for hedge funds. 

D) assets under management is asymmetric and is the usual fee structure for mutual funds. 

The correct answer is A

This is the only true statement. Fees based upon profits are asymmetric and are usually the fee structure for hedge funds.

2、Managers of hedge funds are typically compensated by:

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

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

C) an incentive fee, based upon some performance goal set at the beginning of the fiscal year.

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

The correct answer is A

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

3、The fee structure of a hedge fund may lead to biases in performance data because:

A) hedge fund managers are not required to disclose information regarding fee structures.

B) hedge fund managers charge higher fees than managers of traditional funds.

C) fund managers have incentives to take big risks if past performance has been poor.

D) fund manager compensation can vary widely from year to year.

The correct answer is C

Hedge fund managers would report performance net of fees if at all. Hedge fund managers have the potential to earn more than managers of traditional funds, but this does not bias performance data. Hedge fund managers typically receive a modest base fee (1%) and then a large incentive fee based upon performance. If past performance has been poor, then fund managers feel they have “nothing to lose” and may invest more aggressively.

4、With respect to requiring a 30-day notice and only being able to make withdrawals on only specific days per year, which of the following is/are usual restrictions on hedge funds?

A) Being able to make withdrawals on only specific days per year. 

B) Both requiring a 30-day notice and being able to make withdrawals on only specific days per year. 

C) Requiring a 30-day notice only. 

D) Neither requiring a 30-day notice nor being able to make withdrawals on only specific days per year. 

The correct answer is B

Both are usual restrictions.

5、As a percent of the money invested in hedge funds, funds-of-funds account for:

A) well over half, but not near 100%. 

B) about 100%. 

C) about 30%. 

D) a negligible amount that is near zero. 

The correct answer is C

This is the number studies have found.

6、With respect to cash drag and complying with SEC regulations, hedge funds make restrictions on withdrawing money:

A) to avoid cash drag but not to comply with SEC regulations. 

B) to avoid cash drag and to comply with SEC regulations. 

C) to comply with SEC regulations but not to avoid cash drag.

D) for neither reason. 

The correct answer is A

Without restrictions on withdrawals, funds would have to have cash available to meet the demand for withdrawals. Cash has a lower return than other investments. The SEC does not have restrictions on withdrawals.

7、With respect to the diversification that hedge funds can provide in a larger portfolio, it has been found that hedge funds have:

A) not provided much diversification in the past, and their effectiveness will probably decline in the future.

B) provided diversification in the past, and their effectiveness will probably increase in the future.

C) provided diversification in the past, but their effectiveness will probably decline in the future.

D) not provided much diversification in the past, but their effectiveness will probably increase in the future.

The correct answer is C

As hedge funds become more institutionalized, their correlation with the market will increase.

AIM 5: Discuss consideration that should be made when evaluating hedge fund performance and risk.

1、When comparing the historical returns and volatility of the Credit Suisse/Tremont Hedge Fund index to that of the Standard & Poor’s 500 over the period 1994 to 2006, the Credit Suisse/Tremont Hedge Fund index returns had a:

A) higher return and lower standard deviation. 

B) lower return and lower standard deviation. 

C) higher return and higher standard deviation. 

D) lower return and higher standard deviation. 

The correct answer is A

Net of fees, the average annualized hedge fund index and stock index returns were 10.8% and 10.3%, respectively. The standard deviations were 7.8% and 14.5%.

2、Which of the following statements regarding hedge fund performance is FALSE?

A) Hedge funds have demonstrated a lower risk profile than traditional equity investments.

B) The Sharpe ratio for hedge funds has been consistently higher than for most traditional equity investments.

C) Hedge funds have historically underperformed the S& 500.

D) There is a low correlation between the performance of hedge funds and traditional investments.

The correct answer is C

Hedge funds have demonstrated a lower risk profile than equities when measured by standard deviation. The Sharpe ratio, which is a reward-to-risk ratio, has been higher for hedge funds than for equities. There has been a low correlation between the performance of hedge funds and that of traditional investments. Hedge funds have historically outperformed the S& 500.

3、Hedge fund performance data suffers from serious biases that can be attributed to the fact that:

A) hedge funds as an asset class have not been in existence long enough to have meaningful performance data.

B) there is not a reliable index that tracks hedge fund performance.

C) fund managers tend to submit only favorable performance data.

D) hedge funds usually report returns before deducting any fees.

The correct answer is C

Hedge funds have been in existence since the early 1990’s, long enough to compile meaningful data. There are several reliable indexes designed to track hedge funds. Fund managers, when they do submit data, would report performance net of fees. One of the primary reasons why performance data has biases is that submission is strictly voluntary, so managers tend to only submit impressive performance information.

[此贴子已经被作者于2009-7-2 10:47:41编辑过]

AIM 6: Summarize the empirical research on hedge fund performance.

1、The serial correlation of a hedge fund’s returns is usually:

A) negative and is considered evidence of managers massaging their returns data. 

B) positive and is caused by low liquidity. 

C) positive and is considered evidence of managers massaging their returns data. 

D) negative and is caused by low liquidity. 

The correct answer is C

The positive serial correlation is considered evidence of managers massaging their reported returns in that they are probably trying to reduce the period-to-period variability of the returns.

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