Question 1

Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

Accepted Answer

The answer of Hedging this portfolio by selling S&P 500...

Question 2

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?

Accepted Answer

To calculate the annualized return, follow these steps:

Step 1: Calculate the net asset value (NAV) of the hedge fund

NAV = (Assets - Liabilities) / Shares Outstanding 
NAV = ($800,000,000 - $100,000,000) / 70,000,000 
NAV = $10.00

Step 2: Calculate the ending value of the investment

Ending Value = Initial Investment * (1 + Return)^Number of Years 
Since the lockout period is 3 years, the total holding period is also 3 years. 
We need to solve for the Return that will give us the ending value based on the NAV: 
$500,000 * (1 + Return)^3 = Ending Value 
Ending Value = Shares Owned * NAV 
Ending Value = 500,000 / 10 = 50,000 
$500,000 * (1 + Return)^3 = 50,000 
1 + Return = (50,000 / 500,000)^(1/3) 
1 + Return = 0.87055 
Return = -0.12945 or -12.95%

Step 3: Calculate the annualized return

Annualized Return = [(1 + Return)^(1 / Number of Years)] - 1 
Annualized Return = [(1 - 0.12945)^(1 / 3)] - 1 
Annualized Return = 0.04796 or 4.796%

Therefore, the annualized return over the 3-year holding period is 15.18%.

Question 3

When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund,it means that this fund may sell short up to ______ every $100 in net assets and increase the long position to __________ of net assets.

Accepted Answer

A 120/20 fund means the fund can short sell up to 20% of its net assets and use the proceeds to increase its long position to 120% of its net assets.

Question 4

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?

Accepted Answer

The value of your investment after 3 years is calculated by multiplying the number of shares you own by the new share price. Initially, the net asset value per share is ($800 million - $100 million) / 70 million shares = $10. After 3 years, the share price is $15.28. Your initial investment of $500,000 at $10 per share means you own 50,000 shares. Therefore, the value of your investment is 50,000 shares * $15.28 = $764,000.

Question 5

Which of the following investment style could be the best description of the Long Term Capital Management market neutral strategies?

Accepted Answer

Long Term Capital Management (LTCM) primarily used convergence arbitrage strategies, which involve taking advantage of price discrepancies between related financial instruments, expecting them to converge over time.

Question 6

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.
-When you hedge your stock portfolio with futures contracts the value of your portfolio beta is __________.

Accepted Answer

When you hedge your portfolio by selling futures contracts, you aim to offset the market risk, effectively reducing the portfolio beta to 0.

Question 7

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 3% management fee on assets.The fee is imposed on year end asset values.What is the end of year NAV for the fund?

Accepted Answer

The end of year NAV is $16.30. The assets grow to $168 million at the end of the year. The management fee is $5.04 million. The NAV is $162.96 million, or $16.30 per share.

Question 8

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?

Accepted Answer

First, calculate the expenses incurred by the fund:
Expense ratio = 2.5% of year end value
Assuming the year end value is equal to the start of the year value plus gross return:
Year end value = $250 million + (18% x $250 million) = $295 million
Expenses = 2.5% x $295 million = $7.375 million

Next, calculate the net return on assets:
Net return = gross return - expenses
Net return = 18% - 2.5% = 15.5%

Finally, calculate the rate of return on the fund:
Rate of return = net return / assets
Rate of return = 15.5% / $250 million = 0.155
Rate of return = 15.05% (rounded to two decimal places)

Question 9

How much is the portfolio expected to be worth 3 months from now?

Accepted Answer

The answer of How much is the portfolio expected to...

Question 10

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?

Accepted Answer

The rate of return is calculated as the change in net asset value (NAV) plus dividends, minus expenses, divided by the initial NAV. Initial NAV = ($400M - $60M) / 16M shares = $21.25. Final NAV = ($500M - $40M) / 20M shares = $23. Dividends = $0.75. Expense = 2.75% of initial NAV. Rate of return = [(23 - 21.25 + 0.75) / 21.25] - 0.0275 = 8.52%.

Question 11

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

Accepted Answer

Multi strategy funds are known to adapt and switch between different investment strategies depending on market conditions and the fund manager's outlook. This can include changing the types of securities invested in and the proportions of assets in different market sectors. Option A, asset allocation funds, typically have a more static mix of assets based on the investor's risk tolerance and investment goals. Option C, event driven funds, focus on investing in companies experiencing significant corporate events such as mergers, acquisitions, or bankruptcies. Option D, market neutral funds, aim to achieve returns that are not dependent on the direction of the overall market by taking long and short positions on individual securities.

Question 12

The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extreme unlikely statistical event called ________.

Accepted Answer

The answer of The collapse of the Long Term Capital...

Question 13

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 0.1% incentive bonus.
-What was the management cost for the year?

Accepted Answer

The fund's gross return on assets is 21%, but after deducting the expense ratio, the net return on assets is 19%. The benchmark was up 16.5%, so the fund outperformed the benchmark by 2.5%.

Management fee = $200 million * 2% = $4 million
Incentive bonus = 0.1% * 2.5% * $200 million = $500,000

Therefore, total management cost = management fee + incentive bonus = $4,500,000

Hence, the best choice is C, $5,929,000 is incorrect because it is too high, B $4,900,000 is incorrect because it only considers management fee but not the incentive bonus, and D $6,446,000 is incorrect because it overestimates the total management cost.

Question 14

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.
-How many S&P 500 contracts do you need to sell to hedge your portfolio?

Accepted Answer

The answer of You manage $15 million hedge fund portfolio...

Question 15

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?

Accepted Answer

The answer of You manage $15 million hedge fund portfolio...

Question 16

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

Accepted Answer

Market neutral hedge funds use leverage to increase their returns by borrowing money to invest in securities. While this can potentially earn higher returns, it also leads to higher volatility in the fund's performance. The other options (pure play, directional bets, and net short positions) may all be used by hedge funds, but they are not specific to market neutral strategies and do not necessarily contribute to increased volatility.

Question 17

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.
-Which of the following are not managed investment companies?

Accepted Answer

Hedge funds, closed-end funds, and open-end funds are all examples of managed investment companies. However, unit investment trusts are not managed. They are essentially portfolios of fixed-income securities or other investments that are assembled and held by a trustee until the trust terminates.

Question 18

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?

Accepted Answer

The answer of Assume that you have invested $500,000 to...

Question 19

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%.
-Based on the above data,which of the following set of transactions will yield positive riskless arbitrage profits?

Accepted Answer

The answer of A one-year oil futures contract is selling...

Question 20

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 0.1% incentive bonus.
-What was the annual return on this fund?

Accepted Answer

The answer of Consider a hedge fund with $200 million...

Quiz 20: Hedge Funds

Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

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?

When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund,it means that this fund may sell short up to every $100 in net assets and increase the long position to ____ of net assets.