LOS i, (Part 1): Discuss the descriptive accuracy of the term "hedge fund," and define hedge fund in terms of objectives, legal structure, and fee structure.

Q1. 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 managers are prohibited from advertising or marketing the fund.

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

Q2. Managers of hedge funds are typically compensated by:

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

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

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

Q3. Hedge funds operating in the United States that abide by certain guidelines:

A)   can utilize certain hedging strategies.

B)   gain exemption from most SEC regulations.

C)   may advertise to “accredited” investors.

LOS i, (Part 1): Discuss the descriptive accuracy of the term "hedge fund," and define hedge fund in terms of objectives, legal structure, and fee structure. fficeffice" />

Q1. To avoid most SEC regulations, hedge funds organized in the ffice:smarttags" />United States typically operate within all of the following guidelines EXCEPT hedge:

A)   funds may accept a maximum number of investors.

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

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

Correct answer is C)

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.

Q2. Managers of hedge funds are typically compensated by:

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

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

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

Correct answer is B)        

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

Q3. Hedge funds operating in the United States that abide by certain guidelines:

A)   can utilize certain hedging strategies.

B)   gain exemption from most SEC regulations.

C)   may advertise to “accredited” investors.

Correct answer is B)        

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.

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