Alternatives - Qualitative

Question 1

What is the definition of contango?

Answer 1

When future prices are higher than spot prices due to little or no convenience yield causing futures to have a lower return than the underlying)

Question 2

What is the definition of backwardation?

Answer 2

When future prices are lower than spot prices and futures have a higher return than the underlying due to high convenience yields

Question 3

What is a convenience yield?

Answer 3

The non-cash benefit of holding a physical commodity versus a derivative.

If the opportunity costs and other costs are larger than the benefits, the forward price is higher than the spot price. Conversely, if the opportunity costs and other costs are lower than the benefits, the forward price is lower than the spot price.

Question 4

What are the four main strategies of Hedge Funds?

Answer 4

Equity hedge strategies

Event-driven strategies

Relative value strategies

Macro strategies

Question 5

What are the main Equity Hedge Strategies?

Answer 5

Market Neutral

Fundamental Long/Short Growth

Fundamental Value

Short Biases

Sector Specific

Question 6

Describe a Market Neutral Equity Hedge Strategy?

Answer 6

The fund takes long positions in securities identified as undervalued and short positions in those identified as overvalued, while aiming for an overall beta that is close to zero.

Given that there is very little market exposure, these portfolios may require leverage to achieve meaningful returns.

Question 7

Describe Fundamental Long/short growth Equity Hedge Strategy

Answer 7

The fund takes long positions in companies that they expect to exhibit high growth through their application of fundamental analysis while taking short positions on companies facing downward pressures.

These portfolios tend to be long biased.