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Exam 17: Hedge Funds

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Question 1

Multiple Choice

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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 D)
F) A) and B)

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Question 2

Multiple Choice

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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 reorganisation

A) I only
B) I and II only
C) I, II and III only
D) I, II, III and IV

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

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D

Question 3

Multiple Choice

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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 lock-out period is 3 years. How many shares did you purchase?

You manage $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume that the risk-free rate is 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 share market may fall and hedge your portfolio by selling the 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your share portfolio with futures contracts the value of your portfolio beta is ________.

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

Hedge funds report average returns in December that are higher than their average returns in other months. This phenomenon ________. I. is called the Santa effect II. often results from over generous valuation of illiquid assets III. appears stronger for lower-liquidity funds IV. can be explained by managers' attempts to inflate assets to collect higher performance bonuses

Higher returns of equity hedge funds as compared to the S&P 500 index reflect positive compensation for ________ risk.

You believe that the spread between the September S&P 500 future and S&P 500 index is too large and will soon correct. To take advantage of this mispricing a hedge fund should ________.

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

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%. Taking into account the one-year oil futures price and the arbitrage profit implied, which of the following set of transactions will yield positive riskless arbitrage profits?

Which of the following typically employ significant amounts of leverage? I. Hedge funds II. Equity mutual funds III. Money market funds IV. Income mutual funds

You manage $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume that the risk-free rate is 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 share 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?

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?

Assuming 2% management fee, what is the expected management compensation per share if the fund net asset value exceeds the stated benchmark?

Unlike market-neutral hedge funds which have betas near ________, directional long funds exhibit highly ________ betas.

A restriction where investors cannot withdraw their funds for as long as several months or years is called ________.

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 lock-out period is 3 years. If the share price after 3 years increases to $15.28, and using your calculation for how many shares you purchased, what is your annualised return over the 3-year holding period?

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 ________.

An example of a neutral pure play is ________.