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Exam 17: Hedge Funds

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Question 21

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Assume the risk-free interest rate is 10% and is equal to fund's benchmark, the portfolio net asset value is $100 and the fund's standard deviation is 20%. Also assume time horizon of 1 year. What is the exercise price on the incentive fee?

A) $100
B) $105
C) $110
D) $115

E) None of the above
F) A) and B)

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Question 22

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________ allow for more active short-selling and derivatives positions.

A) Commingled funds
B) REITs
C) ETFs
D) 130/30 Funds

E) B) and D)
F) A) and D)

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Question 23

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A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk but T-bond futures are only available with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105 000. The proper hedge ratio to use is ________.

Research by Aragon (2007) indicates that lock up restrictions on redemptions and positive serial correlations of returns indicate that hedge funds often face ________ problems.

You manage $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume that the risk-free rate is 2% per quarter and the current value of the S&P 500 index = 1200. You want to exploit positive alpha but you are afraid are afraid that the share market may fall and hedge your portfolio by selling the 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is expected quarterly return on the hedged portfolio?

Assume that you have invested $500 000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities and 70 million shares outstanding. Your initial lock-out period is 3 years. If the share price after 3 years increases to $15.28, and using your calculation for how many shares you purchased, what is the value of your investment?

Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to ________.

Malkiel and Saha(2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is ________ than the survivorship bias for mutual funds.

Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year end value, what is the rate of return on the fund?

To attract new clients hedge funds often select reporting periods which show abnormally high returns. This is called ________.

Some argue that abnormally high returns of hedge funds are tainted by ________, which arises when unsuccessful funds cease operations leaving only successful ones.

You believe that the spread between the September S&P 500 future and S&P 500 index is too large and will soon correct. This is an example of ________.

Management fees for hedge funds typically range between ________ and ________.

Which of the following are characteristics of a hedge fund? I. Pooling of assets II. Strict regulatory oversight by the SEC III. Investing in equities, debt instruments and derivative instruments IV. Professional management of assets

When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, it means that this fund may sell short up to ________ every $100 in net assets and increase the long position to ________ of net assets.

What is the Black-Scholes value of the call option on management incentive fee?

The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extreme unlikely statistical event called ________.

A high water mark is a limiting factor of hedge fund manager compensation. This means that managers cannot charge incentive fees ________.

How much is the portfolio expected to be worth 3 months from now?

The difference between market neutral and long/short hedges is that market neutral hedge funds ________.