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Exam 20: Hedge Funds

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Question 1

Multiple Choice

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In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ________ that are ________ than their average returns in other months.

A) September; lower
B) January; higher
C) January; lower
D) December; higher

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

Correct Answer

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D

Question 2

Multiple Choice

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

A) .5%; 1.5%
B) 1%; 2%
C) 2%; 5%
D) 5%; 8%

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

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Question 3

Multiple Choice

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Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the management cost for the year?

If a long-short hedge fund were banned by government regulation from short selling, which statement would no longer be true?

Hedge fund managers are compensated by ________.

Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager's outlook are called ________.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio?

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

An example of a neutral pure play is ________.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is ________.

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

Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio ________ and a long position in portfolio ________.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits?

Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of ________.

Hedge funds can invest in various investment options that are 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

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?

Convertible arbitrage hedge funds ________.

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 lockout period is 3 years. How many shares did you purchase?

Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $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 $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

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 lockout period is 3 years. If the share price after 3 years increases to $15.28, what is the value of your investment?