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Exam 20: Hedge Funds

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Question 31

Multiple Choice

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If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio's net asset value is S0, 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 ________.

A) .2; S₀
B) 1; S₀(1 + r_f)
C) 1.2; S₀
D) .2; S₀(1 + r_f)

E) A) and B)
F) B) and C)

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Question 32

Multiple Choice

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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?

A) $100
B) $105
C) $110
D) $115

E) All of the above
F) A) and B)

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Question 33

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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 ________.

A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

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 ________.

To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called ________.

As of 2017, hedge funds had approximately ________ under management.

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.

Hedge funds are typically set up as ________.

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?

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 ________.

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

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 ________.

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?

A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees ________.

A(n) ________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

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?

According to a model that was estimated using monthly excess returns over a 5 year period, ending in October of 2014, average returns of equity hedge funds are ________ the S&P 500 Index.

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?

The fastest-growing category of hedge funds is feeder funds. These funds invest in ________.