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.

---

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.

---

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.

---

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.

---

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.

---

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.

---

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.

Kingpin804

Which of the following strategies is least likely to be used by a hedge fund to increase leverage?

A) Borrowing external funds.

B) Margin borrowing.

C) Pursuing arbitrage opportunities.

---

Borrowing through a margin account and borrowing external funds are methods commonly used by hedge funds to increase leverage. Hedge funds are generally allowed to pursue arbitrage opportunities, which may or may not increase leverage.

Kingpin804

In periods of high volatility, hedge funds may encounter broker-dealers that adopt policies of extremely conservative marking-to-market of fund assets. This is called:

A) counterparty risk.

B) pricing risk.

C) settlement risk.

---

Counterparty risk is the exposure to the creditworthiness of the broker-dealers that hedge funds transact with. Settlement risk describes the risk that a counterparty, such as a broker-dealer, fails to deliver a security as agreed. Pricing risk occurs when broker-dealers, in order to protect themselves, adopt extremely conservative pricing policies, which in turn requires hedge funds to post a greater margin.

Kingpin804

Biases in hedge fund performance measurement are least likely to include:

A) incomplete historical data.

B) smoothed pricing.

C) correlation bias.

---

The six most common biases present in hedge funds are: “Cherry Picking” by managers. Incomplete historical data. Survival of the fittest. Smoothed pricing. Asymmetrical returns. Fee structures and incentives.

Kingpin804

Which of the following statements regarding hedge fund performance is NOT correct?

A) Hedge funds have historically underperformed the S&P 500.

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

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

---

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. Hedge funds have historically outperformed the S&P 500.