GS 2

Question 1

What are the main lines of differences between hedge fund and mutual fund?

Answer 1

1) Compensation
2) Initial investment
3) Lock-up period
4) Strategies used
5) Size and AUM
6) Criteria for investors
7) Regulation
8) Disclosure

Question 2

Why hedge funds can reduce mispricings more efficiently than mutual funds? Why hedge funds are market-neutral.

Answer 2

Hedge funds use derivatives and short-selling to aggresively correct mispricing by locking in profit and hedging from other market movements

Question 3

What are 4 hedge fund strategies?

Answer 3

1) Long-short equity
2) Event-based
3) Fixed-income arbitrage
4) Macro strategy

Question 4

What are the problems with assessing hedge fund performance?

Answer 4

1) Voluntary disclosure - survivor bias
2) Hard to value positions in complex derivatives
3) Hard to value inherent low-tail risk
4) Past performance is biased view on hedge fund risk (think LTCM)

Question 5

What are the risks for the economy from hedge funds?

Answer 5

1) Investor protection (10% HFs go bust every year)
2) Adding excess volatility and price overreaction to the market
3) Risks to the financial institutions (credit exposure)
4) Liquidity risks

Question 6

What is the future of hedge funds?

Answer 6

1) More regulation
2) More funds chasing same arbitrage - less profits, more activism
3) Less discretion for HFs as they get institutional investors

Question 7

What are the built-in mechanisms for Bitcoin?

Answer 7

1) Reward honest participation
2) Bootstrap acceptance by early adopters
3) Guard against concentration of power

Question 8

What are Bitcoin’s design principles?

Answer 8

1) Absolute scarcity of money supply
2) No centralized authority to distribute coins
3) System of bookkeeping that verifies transactions

Question 9

What are Bitcoin’s enabling technologies?

Answer 9

1) Blockchain

2) Cryptography

Question 10

What are Bitcoin intermediaries?

Answer 10

1) Currency exchanges
2) Mixers
3) Miner pools
4) Digital wallets

Question 11

What are the three phases of use of Bitcoin?

Answer 11

1) Illegal (early)
2) Consumer payments, buy-and-hold (now)
3) Mainstream source of value and technology of payment (future)

Question 12

What are the risks of Bitcoin?

Answer 12

1) Value risk
2) Shallow market risk
3) Operational risks (malware, attacks)
4) Frozen account risk (e.g. legal stuff)
5) Privacy risk
6) Transaction risk (irreversible)
7) Counterparty risk (currency exchanges might die without reimbursement)

Question 13

What are the aspects of Bitcoin regulation?

Answer 13

1) Fighting Bitcoin-specific and Bitcoin-facilitating crime
2) Consumer protection
3) Regulatory options (impose constraints, impose taxes, etc.)

Question 14

List 4 reasons why Bitcoin can be called a Social science laboratory

Answer 14

1) Bitcoin as a financial asset
2) Incentive-compatibility in Bitcoin protocol
3) Privact and anonkmity
4) Monetary policy

Question 15

List 4 key sources of fragility of pre-crisis financial system

Answer 15

1) Badly supervised BS of largest banks
2) Run-prone design
3) Weak regulation of OTC derivatives
4) Reliance on market discipline

Question 16

Why pre-crisis financial regulation was so inefficient?

Answer 16

1) SEC mission was to protect customers
2) Reliance on market discipline
3) Too hard to understand all risk accumuated in complex securities
4) Underestimating disaster risks

Question 17

What are the 2 risks of financing ton of securitized assets with very high leverage?

Answer 17

1) Creditor runs

2) Fire-sale losses

Question 18

What were regulatory responses to short-term high leverage problem

Answer 18

1) Surviving IBs took banking charters and got supervised by Fed, not SEC
2) Elimination of tri-party short-term credit provision
3) Bank capital requirements are stricter

Question 19

What were regulatory responses to the swap issue?

Answer 19

1) All transaction are done through central counterparty (clearinghouse)
2) Minimum capital and credit requirements

Question 20

What were 2 wrong assumptions when relying on market discipline?

Answer 20

1) Markets will always self-correct

2) Banks internal risk control will be enough, banks will prioritize risk control over profits

Question 21

Overall, what are the 4 main reasons why financial system got so screwed in the crisis?

Answer 21

1) Undue reliance on market discipline
2) Failure of SEC to prioritize financial stability
3) Financial firms grew enormous balance sheet on very high leverage
4) Creditors supplied cheap credit to banks since believed that they won’t be allowed to fail

Question 22

What were 4 main regulatory changws after the crisis?

Answer 22

1) US banks are now under Fed supervision
2) Improvement in capitalization of largest financial institutions
3) Reduction of unsafe practices with derivatives
4) New failure resolution methods

Question 23

What are the remaining challenges in financial stability?

Answer 23

1) No plan if CCPs fail
2) CCPs are new “too big to fail”
3) Regulators can become lax as memory of the crisis fades

Question 24

What are the benefits of Algorithmic Trading (AT)?

Answer 24

1) Lower costs
2) Less human error
3) More productivity

Question 25

What are the 3 financial developments that supported rise of AT?

Answer 25

1)