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

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Question 22

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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 ______.

A) 143
B) 157
C) 196
D) 218

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

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Question 23

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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 __________.

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

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

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

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

Hedge funds managers are compensated by ___________________.

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 __________.

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

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

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?

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 __________.

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

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

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?

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?

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

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