Exam

HF101 final exam

20 questions · pass mark 70%

Answer every question, then check your answers. The pass mark is 70%.

Question 1 of 20

A new colleague looking at the Kessling Harbor Equity Long/Short Fund says: "It's a hedge fund, so it must be a low-risk, carefully hedged investment." What is the best response?

A Correct: hedge funds are required by law to keep their longs and shorts equal B Correct: the name means investors are protected against losses in falling markets C Not necessarily: the name now describes the fund's legal and commercial form, not how much it hedges D Not necessarily: only hedge funds set up outside the US are required to hedge

Question 2 of 20

A hedge fund's offering memorandum says it aims for absolute returns with low correlation to stock markets. Which description best fits that aim?

A To make money in most market conditions, without simply rising and falling with stocks B To beat a broad stock market index by a fixed margin in every calendar year C To track a broad stock market index as closely as possible at a low cost D To guarantee investors a return above the risk-free rate in every year

Question 3 of 20

Hedge funds and private equity funds are both privately offered, are commonly set up as limited partnerships, and commonly charge a management fee plus a share of profits. What is the biggest difference between them?

A Hedge funds are sold to the general public, while private equity funds are offered privately B Hedge funds charge no management fee, while private equity funds charge one on commitments C Hedge funds must publish their holdings daily, while private equity funds report quarterly D Liquidity: hedge funds are open-ended, while private equity funds lock money up for years

Question 4 of 20

After the 2008 financial crisis, what changed for many US hedge fund managers?

A They were required to offer daily redemptions to all of their investors B They became subject to SEC registration and regular reporting, including on leverage and risk C They were barred from using leverage or short selling in the funds they manage D They were allowed for the first time to sell their funds to the general public

Question 5 of 20

A long/short equity fund has $150m of capital, $180m of long positions and $135m of short positions. What are its gross and net exposure?

A Gross 210%, net +30% B Gross 30%, net +210% C Gross 175%, net +25% D Gross 120%, net +90%

Question 6 of 20

In a year when the stock market rises 15%, two equity long/short funds each return +6%. Fund P ran net exposure of about +80% all year; Fund Q was market-neutral, with net exposure close to zero. Which reading is most reasonable?

A Both managers showed equal stock-picking skill, because their returns were the same B Fund P showed more skill, because it had more of its capital working in a rising market C Fund Q's return came mainly from stock selection, while Fund P's owed much to market exposure D Fund Q must have been net short, because a market-neutral fund cannot gain in a rising market

Question 7 of 20

A managed futures program holds a smaller position in a jumpy crude oil market and a larger position in a calm government bond market. What is the most likely reason?

A Its rules require it to hold more bonds than commodities at all times B Futures exchanges set lower position limits for commodities than for bonds C Its manager expects bond prices to rise and oil prices to fall this year D It sizes positions by volatility, so each market contributes a similar amount of risk

Question 8 of 20

A company agrees to be bought for $25.00 a share in cash. Its shares trade at $24.00, and an analyst estimates they would fall to $19.00 if the deal broke. Ignoring time and costs, what probability of completion does the market imply?

A 96% B 83% C 20% D 17%

Question 9 of 20

A convertible arbitrage fund finds a company's convertible bond that looks cheap compared with the value of its parts. What position does it commonly take?

A Buy the convertible bond and short some of the issuer's shares B Short the convertible bond and buy some of the issuer's shares C Buy the convertible bond and buy the issuer's shares as well D Buy the issuer's shares and short its ordinary bonds instead

Question 10 of 20

On a multi-manager platform, the central risk team commonly hedges out much of each trading team's exposure to the overall stock market. What is the main aim?

A To let each trading team take unlimited risk without any loss limits B To remove any need for the platform to use leverage at the fund level C To guarantee that the platform makes money in every calendar month D To make returns depend mainly on each team's skill, not market direction

Question 11 of 20

The Ridgemont University Endowment, a US tax-exempt investor, plans to invest in Kessling Harbor's master-feeder structure. Through which vehicle would it most commonly invest?

A The onshore feeder, a US limited partnership used mainly by US taxable investors B The offshore feeder, commonly a company, used by non-US and US tax-exempt investors C Directly in the master fund, alongside the two feeder funds and on the same terms D A share class issued by the investment manager, Kessling Harbor Capital, itself

Question 12 of 20

An allocator wants to confirm its holding with a firm other than the manager, and wants an independent opinion on whether the fund's annual financial statements are fairly presented. Which service providers does it look to?

A The prime broker for the holding, and legal counsel for the financial statements B The custodian for the holding, and the fund's board for the financial statements C The administrator for the holding, and the auditor for the financial statements D The investment manager for the holding, and the prime broker for the statements

Question 13 of 20

During a volatile month, a leveraged fund's prime broker raises its margin requirements while the fund's positions are falling in value. What is the most likely consequence?

A The fund must post more collateral or cut positions, possibly selling at poor prices B The fund's borrowing is suspended without cost until markets become calmer C The prime broker converts the fund's short positions into long positions D The fund's investors must wire extra capital directly to the prime broker

Question 14 of 20

A fund charges a performance fee of 20% of gains above the high-water mark, crystallized annually; ignore management fees. Its high-water mark is $125.00. NAV per share falls to $110.00 by the end of year 1, then rises to $135.00 before the fee at the end of year 2. What is the year 2 fee per share, and what is the high-water mark afterwards?

A $5.00, and the high-water mark becomes $130.00 B $0, and the high-water mark stays at $125.00 C $2.00, and the high-water mark becomes $135.00 D $2.00, and the high-water mark becomes $133.00

Question 15 of 20

At the end of June, a fund's NAV includes an accrued performance fee of $1.50 a share. The fund then loses money in the second half of the year and ends December below its high-water mark. Fees crystallize annually on December 31. For investors who stayed in all year, what happens to the accrued fee?

A The manager keeps the $1.50, because the fee was earned when it accrued in June B It shrinks away as the losses occur, and no performance fee crystallizes for the year C It is carried forward and paid to the manager on the following December 31 D It is paid to the manager in cash and added to the fund's high-water mark

Question 16 of 20

Kessling Harbor allows redemptions quarterly, on the last day of each calendar quarter, with 60 days' notice. On August 20, an investor whose lock-up has ended decides to redeem. Which dealing date can it use, and when is it most likely to receive most of the money?

A September 30, with all of the money paid on the dealing date itself B September 30, with most of the money paid in the weeks after it C December 31, with most of the money paid in the weeks after it D December 31, with all of the money held back until the audit is done

Question 17 of 20

Over the same year, Fund X returned 11% with volatility of 12%, and Fund Y returned 7% with volatility of 5%. The risk-free rate was 2%. Which fund had the higher Sharpe ratio?

A Fund X, because its 11% return was higher than Fund Y's 7% B Fund Y, with a Sharpe ratio of 1.0 against 0.75 for Fund X C Fund Y, with a Sharpe ratio of 1.4 against 0.92 for Fund X D Fund X, with a Sharpe ratio of 1.33 against 1.0 for Fund Y

Question 18 of 20

A long-biased equity fund returned 14% in a year when stock markets rose strongly, and its beta to the stock market is high. What should an allocator keep in mind before paying hedge fund fees for this record?

A The 14% return shows that the manager has strong stock-picking skill B A high beta means the fund's returns are unrelated to the stock market C The fund's alpha equals its 14% return, since beta only measures risk D Much of the return may be beta, which investors can get cheaply elsewhere

Question 19 of 20

A manager shares only summary exposures with its investors, not individual positions, saying it wants to protect its ideas, especially its short positions. How should an allocator view this?

A As common practice to weigh: more detail eases monitoring, but a fund can be well run without it B As a clear sign of fraud, so the allocator should reject the fund without further review C As a breach of US rules, which require hedge funds to publish every position each day D As irrelevant, because summary exposures reveal everything that positions would show

Question 20 of 20

The Ridgemont University Endowment holds five equity long/short funds from different managers. Its analyst finds that the funds hold many of the same stocks. What is the main concern for Ridgemont's portfolio of managers?

A The five funds will be required to merge because they hold the same stocks B Each fund's fees should fall, because their positions overlap so heavily C The five funds are less diversified than they look, since they share risks D The overlap removes the need for separate due diligence on each manager