35. 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?
36. 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?
37. 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 annual return on this fund?
38. 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?
39. Market-neutral hedge funds may experience considerable volatility. The source of volatile
returns is the use of _________.
40. A hedge fund has $150 million in assets at the beginning of the year and 10 million shares
outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3%
management fee on the assets. The fee is imposed on year-end asset values. What is the end-of–
year NAV for the fund?
41. You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the
beginning of the year. The fund deducted a front-end commission of 4%. The securities in the
fund increased in value by 15% during the year. The fund’s expense ratio is 2% and is deducted
from year-end asset values. What is your rate of return on the fund if you sell your shares at the
end of the year?
42. 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 available only 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 ______.
43. Unlike market-neutral hedge funds, which have betas near ________, directional long
funds exhibit highly _______ betas.
44. Portfolio
A
has a beta of .2 and an expected return of 14%. Portfolio
B
has a beta of .5 and
an expected return of 16%. The risk-free rate of return is 10%. If you manage a long-short equity
fund and want to take advantage of an arbitrage opportunity, you should take a short position in
portfolio ______ and a long position in portfolio __________.
45. According to a model that was estimated using monthly excess returns from January 2005
through November 2011, average returns of equity hedge funds are __________ the S&P 500
Index.
46. Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________
portfolios.
47. Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive
compensation for __________ risk.
48. 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 __________.
49. 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.
50. To attract new clients, hedge funds often include past returns of funds only if they were
successful. This is called __________.
51. Some argue that abnormally high returns of hedge funds are tainted by __________, which
arises when unsuccessful funds cease operations, leaving only successful ones.
52. Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%,
which is __________ the survivorship bias for mutual funds.
53. Hedge fund managers receive incentive bonuses when they increase portfolio assets
beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to
__________.
54. A typical hedge fund incentive bonus is usually equal to ________ of investment profits
beyond a predetermined benchmark index.
55. The fastest-growing category of hedge funds is feeder funds. These funds invest in
________.
56. A high water mark is a limiting factor of hedge fund manager compensation. This means
that managers can’t charge incentive fees ________.
57. If the risk-free interest rate is
rf
and equals the fund’s benchmark, the portfolio’s net asset
value is
S
0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive
fee is equivalent to receiving ______ call(s) with exercise price ________.
58. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the
portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time
horizon of 1 year.
What is the exercise price on the incentive fee?
59. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the
portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time
horizon of 1 year.
What is the Black-Scholes value of the call option on the management incentive fee?
60. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the
portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time
horizon of 1 year.
Assuming a 2% management fee and a 20% incentive bonus, what is the expected management
compensation per share if the fund’s net asset value exceeds the stated benchmark?