1. 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
2. A __________ is a private investment pool open only to wealthy or institutional investors
that is exempt from SEC regulation and can therefore pursue more speculative policies than
mutual funds.
3. Hedge funds are typically set up as _______________.
4. A(n) _______________ hedge fund attempts to profit from situations such as mergers,
acquisitions, restructuring, bankruptcy, or reorganization.
5. ______ are private partnerships of a small number of wealthy investors, are often subject
to lock-up periods, and are allowed to pursue a wide range of investment activities.
6. Which of the following typically employ(s) significant amounts of leverage?
I. Hedge funds
II. Equity mutual funds
III. Money market funds
IV. Income mutual funds
7. As of 2012, hedge funds had approximately _____ under management.
8. A restriction under which investors cannot withdraw their funds for as long as several
months or years is called __________.
9. Hedge fund managers are compensated by ___________________.
10. Management fees for hedge funds typically range between _____ and _____.
11. 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
12. A typical traditional initial investment in a hedge fund generally is in the range between
_____ and _____.
13. The difference between market-neutral and long-short hedges is that market-neutral
hedge funds _________.
14. Convertible arbitrage hedge funds _________.
15. Assuming positive basis and negligible borrowing cost, which of the following transactions
could yield positive arbitrage profits if pursued by a hedge fund?
16. An example of a neutral pure play is _______.
17. You believe that the spread between the September S&P 500 future and the S&P 500
Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should
______________.
18. You believe that the spread between the September S&P 500 future and the S&P 500
Index is too large and will soon correct. This is an example of ______________.
19. 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%.
The 1-year oil futures price should be equal to __________.
20. 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%.
The arbitrage profit implied by these prices is _____________.
21. 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?
22. 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?
23. 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?
24. 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.
What is your annualized return over the 3-year holding period?
25. Which of the following are
not
managed investment companies?
26. 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.
How many S&P 500 contracts do you need to sell to hedge your portfolio?
27. 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
__________.
28. 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?
29. 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.
How much is the portfolio expected to be worth 3 months from now?
30. 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.
Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.
31. 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 ____________________.
32. When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this
means that the fund may sell short up to ______ for every $100 in net assets and increase the long
position to __________ of net assets.
33. The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an
extremely unlikely statistical event called ________.
34. Which of the following investment styles could be the best description of the Long Term
Capital Management market-neutral strategies?