gita

 

5、Which of the following is an example of structural risk associated with hedge fund investments?

A) Market risk.

B) Credit risk.

C) Operational risk.

D) Liquidity risk.

gita

 

The correct answer is C

Structural risk focuses on risks stemming from a hedge fund’s operations and is therefore associated with operational risk. Market risk, credit risk, and liquidity risks, while important, are examples of strategy risks.

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2、One of the main advantages to investing in a fund of funds (FOF) is that FOF provide:

A) lower management fees.

B) a proven track record.

C) improved diversification of assets.

D) higher expected returns.

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The correct answer is C

FOF will actually have higher management fees because the FOF will charge a fee in addition to the fee charged by the hedge fund manager. Hedge funds selected by the FOF may have a good track record, but it is no indication of future performance. FOF actually have lower expected returns because of increased diversification. FOF can diversify across many hedge funds strategies to decrease risk.

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3、Style drift and survivorship bias are often mentioned in the analysis of hedge fund performance. Which of the following statements is most accurate? Fund of funds can serve as better indicators of aggregate hedge fund performance than hedge fund indices because they tend to have a lower level of:

A) survivorship bias only. 

B) style drift only. 

C) both survivorship bias and style drift.

D) neither style drift nor survivorship bias, and fund of funds do not serve as good indicators of aggregate hedge fund performances. 

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The correct answer is A

A fund of funds may serve as a better indicator of aggregate performance of hedge funds (i.e., a better benchmark) because they suffer from less survivorship bias. If a fund of funds includes a fund that dissolves, the fund of funds includes the effect of that failure in the return of the fund of funds; however, an index may simply drop the failed fund. A fund of funds can suffer from style drift. This can produce problems in that the investor may not know what he/she is getting. Over time, managers may tilt their respective portfolios in different directions. It is not uncommon that two fund of funds who claim to be of the same style to have returns with a very low correlation.

gita

 

The correct answer is C

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