Question 1

Sadka (2009)shows that exposure to unexpected declines in ________ is an important determinant of average hedge fund returns and that the spreads in average returns across funds with the highest and lowest ________ may be as much as 6% annually.

Accepted Answer

Sadka (2009) shows that exposure to unexpected declines in market liquidity is an important determinant of average hedge fund returns and that the spreads in average returns across funds with the highest and lowest liquidity risk may be as much as 6% annually. Therefore, the correct answer is B, as it accurately reflects the findings of the study. Choice A is incorrect, as market risk is not specifically mentioned in the study. Choice C is also incorrect, as unsystematic risk or unique risk is not discussed in relation to hedge fund returns. Choice D is unrelated to the study's findings. Finally, option E is also incorrect, as while market risk is mentioned in the study, it is not linked to default risk as an important determinant of hedge fund returns.

Question 2

Hedge fund incentive fees are essentially

Accepted Answer

Hedge fund incentive fees can be likened to call options on the portfolio with a strike price equal to the current portfolio value times one plus the benchmark return. This is because hedge fund managers typically earn a percentage of the profits if the fund's return exceeds a certain benchmark or hurdle rate, similar to how a call option gives the holder the right to buy an asset at a set price if the asset's value increases beyond that price.

Question 3

Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds.

Accepted Answer

Hedge funds often employ redemption notices that require investors to provide notice of several weeks to several months notice of their desire to redeem funds.

Question 4

Regarding hedge fund incentive fees,hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.

Accepted Answer

Hedge fund managers earn incentive fees when the portfolio return is large, but they do not have to refund fees if the portfolio return is negative; they simply do not earn the incentive fee.

Question 5

________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.

Accepted Answer

Data mining involves sorting through historical data to find patterns that can be used to make profitable trades. Pairs trading involves trading a pair of securities that have historically had a strong correlation, while alpha transfer and beta shifting involve adjusting exposure to different factors such as market risk or specific stock performance. Therefore, A is the best choice.

Question 6

Hedge fund performance may reflect significant compensation for ________ risk.

Accepted Answer

Hedge fund performance often includes compensation for liquidity risk, as these funds may invest in less liquid assets that require a premium for the potential difficulty in selling them quickly.

Question 7

A ________ is an investment fraud in which a manager collects funds from clients,claims to invest those funds on their behalf,reports extremely favorable investment returns,but in fact uses the funds for his own use.

Accepted Answer

This is a classic description of a Ponzi scheme, named after Charles Ponzi who famously ran such a scheme in the early 20th century. In a Ponzi scheme, earlier investors are paid using the funds from newer investors, rather than any legitimate investment returns. Eventually, the scheme collapses when there are not enough new investors to fund the payouts to earlier investors, and the fraud is exposed.

Question 8

The typical hedge fund fee structure is

Accepted Answer

The typical hedge fund fee structure includes both a management fee of 1% to 2% and an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance. The 12-b1 fee is not typically charged by hedge funds, making choices C and E incorrect. Therefore, the best choice is D, which includes the correct fees for hedge funds.

Question 9

Explain the five major differences between hedge funds and mutual funds.

Accepted Answer

The answer of Explain the five major differences between hedge...

Question 10

Pairs trading is associated with ________.

Accepted Answer

Pairs trading is a statistical arbitrage strategy that involves identifying two highly correlated stocks and trading them against each other.

Quiz 26: Hedge Funds

Sadka (2009) shows that exposure to unexpected declines in is an important determinant of average hedge fund returns and that the spreads in average returns across funds with the highest and lowest may be as much as 6% annually.

Hedge fund incentive fees are essentially

Hedge funds often employ that require investors to provide __ notice of their desire to redeem funds.

Regarding hedge fund incentive fees,hedge fund managers if the portfolio return is very large and if the portfolio return is negative.

________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.

Hedge fund performance may reflect significant compensation for ________ risk.

A ________ is an investment fraud in which a manager collects funds from clients,claims to invest those funds on their behalf,reports extremely favorable investment returns,but in fact uses the funds for his own use.

The typical hedge fund fee structure is

Explain the five major differences between hedge funds and mutual funds.

Pairs trading is associated with ________.

Quiz 26: Hedge Funds

Sadka (2009) shows that exposure to unexpected declines in ________ is an important determinant of average hedge fund returns and that the spreads in average returns across funds with the highest and lowest ________ may be as much as 6% annually.

Hedge fund incentive fees are essentially

Hedge funds often employ ______ that require investors to provide ________ notice of their desire to redeem funds.

Regarding hedge fund incentive fees,hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.

________ refers to sorting through huge amounts of historical data to uncover systematic patterns in returns that can be exploited by traders.

Hedge fund performance may reflect significant compensation for ________ risk.

A ________ is an investment fraud in which a manager collects funds from clients,claims to invest those funds on their behalf,reports extremely favorable investment returns,but in fact uses the funds for his own use.

The typical hedge fund fee structure is

Explain the five major differences between hedge funds and mutual funds.

Pairs trading is associated with ________.

Sadka (2009) shows that exposure to unexpected declines in is an important determinant of average hedge fund returns and that the spreads in average returns across funds with the highest and lowest may be as much as 6% annually.

Hedge funds often employ that require investors to provide __ notice of their desire to redeem funds.

Regarding hedge fund incentive fees,hedge fund managers if the portfolio return is very large and if the portfolio return is negative.