LOS a: Discuss how the characteristics of hedge funds affect traditional methods of performance measurements.

Q1. Which of the following most accurately describes the characteristics of fixed income and equity hedge funds?

A)   Equity hedge funds use more leverage and change their level of leverage more dramatically than do fixed income hedge funds.

B)   Fixed income hedge funds use more leverage and change their level of leverage more dramatically than do equity hedge funds.

C)   Fixed income hedge funds use more leverage than do equity hedge funds, but equity hedge funds change their level of leverage more dramatically than do fixed income hedge funds.

Q2. A market neutral hedge fund has established a net long equity position, and worries about a decrease in stock market value. Which of the following would provide the best protection?

A)   An in-the-money put.

B)   A short sale of stock.

C)   An at-the-money put.

LOS a: Discuss how the characteristics of hedge funds affect traditional methods of performance measurements. fficeffice" />

Q1. Which of the following most accurately describes the characteristics of fixed income and equity hedge funds?

A)   Equity hedge funds use more leverage and change their level of leverage more dramatically than do fixed income hedge funds.

B)   Fixed income hedge funds use more leverage and change their level of leverage more dramatically than do equity hedge funds.

C)   Fixed income hedge funds use more leverage than do equity hedge funds, but equity hedge funds change their level of leverage more dramatically than do fixed income hedge funds.

Correct answer is B)

Fixed income hedge funds use more leverage than do equity hedge funds. Fixed income hedge funds also change their level of leverage more dramatically than do equity hedge funds.

Q2. A market neutral hedge fund has established a net long equity position, and worries about a decrease in stock market value. Which of the following would provide the best protection?

A)   An in-the-money put.

B)   A short sale of stock.

C)   An at-the-money put.

Correct answer is B)

If the stock market decreases, the put increases in value in synch with the option delta. This change in value may not fully protect the fund's position. In contrast, the short stock position does not require a premium to be paid and can better protect the fund's position if the stock market declines.

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