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CSC 2 > 21 - Hedge Funds > Flashcards

21 - Hedge Funds Flashcards

0
Q

What is an offering memorandum?

A

Hedge fund version of prospectus (objectives, risks and terms)

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1
Q

What are 10 ways that hedge funds differ from mutual funds?

A
  1. Lightly regulated
  2. Can short sell
  3. Can use derivatives in any way
  4. Sold to sophisticated/accredited
  5. Possible liquidity constraints
  6. Performance fees
  7. Make profit in all market conditions
  8. Valued monthly
  9. Annual disclosure to unit holders
  10. Can take concentrated positions
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2
Q

What are the requirements for being a sophisticated or accredited investor?

A

Person (incl spouse) must own over $1 mil in financial assets
Or
Pretax net income over $200k (or $300k w/Spouse) in prev 2 years with expectation of exceeding in current year

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3
Q

What three hedge fund types are available to retail investors?

A
  1. Commodity pools
  2. Closed-end funds
  3. Principal protected notes
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4
Q

What can Commodity Pools do that regular mutual funds cannot?

A

Can use leverage and short selling using derivatives.

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5
Q

What is a closed-end fund?

A

Avoids MF investment restrictions but can only redeemed once a year (or less frequently).

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6
Q

What is a PPN?

A

Principal Protected Notes

Principal is guaranteed at maturity by bank or highly rated issuer. Uses hedge fund strategies for the growth portion.

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7
Q

What is one of the best known hedge fund indexes?

A

Credit Suisse/Tremont Hedge Fund Index

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8
Q

What are 4 benefits of hedge funds?

A
  1. Low correlation with traditional asset classes
  2. Risk minimization
  3. Absolute returns
  4. Potentially lower volatility and higher returns
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9
Q

What are 8 risks of hedge funds compared to mutual funds?

A
  1. Light regulation
  2. Manager & market risk
  3. Difficult to understand strategies
  4. Liquidity constraints
  5. Incentive fees
  6. Tax implications
  7. Short sell & leverage
  8. Business risk **
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10
Q

What are two types of incentive fees for hedge funds?

A 
High-water mark (only paid on net new profits)
Hurdle rate (minimum rate of return before the mgr is paid an incentive)
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11
Q

What are three hedge fund strategy categories?

A

Relative Value
Event-driven
Directional

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12
Q

What are three Relative Value strategies?

A

Equity Market-Neutral
Convertible Arbitrage
Fixed-Income Arbitrage

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13
Q

What are three Event-Driven strategies?

A

Merger or risk arbitrage
Distressed securities
High-Yield bonds

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14
Q

What are five directional funds?

A 
Long/Short Equity
Global Macro
Emerging markets
Dedicated Short bias
Managed Futures funds
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15
Q

What is the most popular type of hedge fund strategy (>75% hedge fund activity in Canada), and what is its advantage?

A

Long/Short Equity

Advantage is better able to profit in a declining market than a dedicated long fund.

16
Q

What is the reasoning behind an Equity Market Neutral strategy?

A

Long positions rise more in price rise more than short positions in rising markets, and short positions fall more than long in declining markets.

17
Q

What do Global Macro funds do differently?

A

They bet on major events affecting entire economies rather than just specific companies. (Often user derivatives / leverage to accentuate market moves).

18
Q

What is a managed futures fund?

A

A Hedge Fund that invests in commodity futures and currency markets around the world.

19
Q

What is the formula to calculate a Long/Short Equity fund’s exposure?

A

(Long exposure - Short exposure)

/ Capital

20
Q

What are the two main types of Funds of Hedge Funds?

A
  1. Single-strategy, multi-manager

2. Multi-strategy, multi-manager

21
Q

What are 6 advantages of Funds of Hedge Funds?

A
  1. Due diligence
  2. Reduced volatility
  3. Pro Management
  4. Access to hedge funds
  5. Diversify with less $
  6. Manager and business risk control
22
Q

What are 5 disadvantages of Funds of Hedge Funds?

A
  1. Additional costs
  2. No guarantees of + return
  3. Possibly low/no strategy diversification
  4. Insufficient or excessive diversification
  5. Additional leverage

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