Chapter 20 CAIA Flash Cards - Relative Value Hedge Funds

Question 1

Equity Long/Short Funds

Answer 1

Equity long/short funds tend to have net positive systematic risk exposure from taking a net long position, with the long positions being larger than the short positions.

Question 2

Equity Market Neutral Funds

Answer 2

Equity market-neutral funds attempt to balance short and long positions, ideally matching the beta exposure of the long and short positions and leaving the fund relatively insensitive to changes in the underlying stock market index.

Question 3

Short Biased Funds

Answer 3

Short-bias funds have larger short positions than long positions, leaving a persistent net short position relative to the market index that allows these funds to profit during times of declining equity prices.

Question 4

Short Interest

Answer 4

Short interest is the percentage of outstanding shares that are currently held short.

Question 5

Asynchronous Trading

Answer 5

Asynchronous trading is an example of market inefficiency in which news affecting more than one stock may be assimilated into the price of the stocks at different speeds.

Question 6

Complexity Premium

Answer 6

A complexity premium is a higher expected return offered through the consistently lower prices of securities that are difficult to value with precision and therefore must be priced to offer an incentive to market participants to perform the requisite analysis.

Question 7

Test of Joint Hypothesis

Answer 7

An empirical test of market efficiency is a test of joint hypotheses, because the test assumes the validity of a model of the risk-return relationship to test whether a given trading strategy earns consistent risk-adjusted profits.

Question 8

Price Momentum

Answer 8

Price momentum is trending in prices such that an upward price movement indicates a higher expected price and a downward price movement indicates a lower expected price.

Question 9

Earnings Momentum

Answer 9

Earnings momentum is the tendency of earnings changes to be positively correlated.

Question 10

Earnings Surprise

Answer 10

Earnings surprise is the concept and measure of the unexpectedness of an earnings announcement.

Question 11

SUE

Answer 11

Standardized unexpected earnings (SUE) is a measure of earnings surprise.

Question 12

Information Coefficient

Answer 12

The information coefficient measures managerial skill as the correlation between managerial return predictions and realized returns:

Question 13

Uptick Rule

Answer 13

uptick rule that permits short sellers to enter a short sale only at a price that is equal to or higher than the previous transaction price of the stock.

Question 14

Mean Neutrality

Answer 14

Mean neutrality is when a fund is shown to have zero beta exposure or correlation to the underlying market index.

Question 15

Variance Neutrality

Answer 15

Variance neutrality is when fund returns are uncorrelated to changes in market risk, ​including extreme risks in crisis market scenarios.