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Exam 20: Hedge Funds

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Question 21

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According to research conducted by Hasanhodic and Lo (2007) ,average returns of equity hedge funds are __________ the S&P 500 index.

A) equal to
B) considerably higher than
C) slightly lower than
D) slightly higher than

E) B) and D)
F) B) and C)

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Question 22

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

A) long/short bias
B) survivorship bias
C) backfill bias
D) incentive bias

E) B) and C)
F) A) and C)

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Question 23

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Portfolio A has a beta of 0.2 and an expected return of 14%.Portfolio B has a beta of 0.5 and an expected return of 16%.The risk-free rate of return is 10%.If you manage a long/short equity fund and wanted to take advantage of an arbitrage opportunity,you should take a short position in portfolio ______ and a long position in portfolio __________.

The fastest growing category of hedge funds are feeder funds.These funds invest in ________.

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?

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

______ are partnerships of wealthy investors but too small to warrant managing on a separate basis.

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

Assuming positive basis and negligible borrowing cost,which of the following set of transactions could yield positive arbitrage profits a hedge fund might pursue?

You manage $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk free rate 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 stock market may fall and want to 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?

Typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

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 ______.

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

A one-year oil futures contract is selling for $74.50. Spot oil prices are $68 and the one year risk free rate is 3.25%. -The one-year oil futures price should be equal to __________.

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

Hedge funds managers are compensated by ___________________.

Typical initial investment in a hedge fund generally is in the range between _____ and _____.

Consider a hedge fund with $400 million in assets,60 million in debt,and 16 million shares at the start of the year; and $500 million in assets,40 million in debt,and 20 million shares at the end of the year.During the year investors have received an income dividend of $0.75 per share.Assuming that the fund carries no debt,and that the total expense ratio is 2.75%,what is the rate of return on the fund?

Advantages of hedge funds include all but which one of the following?

Hedge funds can invest in various investment options which not generally available to mutual funds.These include _____________. I.futures and options II.merger arbitrage III.currency contracts IV.companies undergoing Chapter 11 restructuring and reorganization