Hedge Fund-Find of Funds

Question 1

Multistrategy fund

Answer 1

deploys its underlying investments with a variety of strategies and sub- managers, much as a corporation would use its divisions.

Question 2

Operational due diligence

Answer 2

is the process of evaluating the policies, procedures, and internal controls of an asset management organization.

Question 3

Well-diversified portfolio

Answer 3

is traditionally interpreted as any portfolio containing only trivial amounts of diversifiable risk.

Question 4

Redemption gates

Answer 4

are a mechanism by which a hedge fund can limit the total amount of capital being redeemed from a fund at any single redemption period (e.g., quarterly).

Question 5

Double layer of fees in FoFs refers to

Answer 5

the two layers of fees charged to investors, including those at the fund level and at the fund of funds level.

Question 6

Merger arbitrage attempts to benefit from

Answer 6

merger activity with minimal risk and is perhaps the best-known event-driven strategy.

Question 7

General partners (GPs)

Answer 7

are fund managers who manage the investment of private equity funds.

Question 8

Top-down approach analyzes

Answer 8

the macroeconomic conditions surrounding the targeted PE markets and then determines the weights and the combination of industry sectors, countries, fund styles, and so on that are best for meeting the PE program objectives under the likely scenarios.

Question 9

Top-down asset allocation emphasizes

Answer 9

allocation based on the analysis of the macro environment and risk premiums, and their expected impact on general categories or types of portfolio investments.

Question 10

Excess kurtosis

Answer 10

provides a more intuitive measure of kurtosis relative to the normal distribution because it has a value of zero in the case of the normal distribution: Excess Kurtosis = {E [(R − μ) 4] ∕σ4} − 3.

Question 11

Recourse

Answer 11

is the set of rights or means that an entity such as a lender has in order to protect its investment.

Question 12

Managed futures refers

Answer 12

to the active trading of futures and forward contracts on physical commodities, financial assets, and exchange rates.

Question 13

Venture capital (VC)

Answer 13

the best known of the private equity categories, is early-stage financing for young firms with high potential growth that do not have a sufficient track record to attract investment capital from traditional sources, like public markets or lending institutions.

Question 14

Seeding funds,

Answer 14

or seeders, are funds of funds that invest in newly created individual hedge funds, often taking an equity stake in the management companies of the newly minted hedge funds.

Question 15

Equity kicker

Answer 15

is an option for some type of equity participation in the firm (e.g., options to buy shares of common stock) that is packaged with a debt financing transaction.

Question 16

Start-up

Answer 16

is a stage when further financing is provided to establish the company and begin to market its new product

Question 17

Consolidation

Answer 17

is an increase in the proportion of a market represented by a relatively small number of participants (i.e., the industry concentration).

Question 18

Hedge fund program refers to

Answer 18

the processes and procedures for the construction, monitoring, and maintenance of a portfolio of hedge funds.

Question 19

Market risk

Answer 19

refers to exposure to directional moves in general market price levels.

Question 20

Idiosyncratic risk

Answer 20

is a type of investment risk, uncertainties and potential problems that are endemic to an individual asset (like a particular company’s stock), or group of assets (like a particular sector’s stocks), or in some cases, a very specific asset class (like collateralized mortgage obligations). It is also referred to as a specific risk or unsystematic risk.

Question 21

systematic risk

Answer 21

the opposite of idiosyncratic risk, which is the overall risk that affects all assets, such as fluctuations in the stock market or in interest rates—or the entire financial system.

Question 22

Funds of funds are

Answer 22

hedge funds with an underlying portfolio of other hedge funds.

Question 23

The primary purposes of funds of funds are

Answer 23

1) to reduce idiosyncratic risk through diversification,
2) to tap into the potential skill of the fund of funds manager in selecting investments, and in monitoring and managing the portfolio of hedge fund investments.
3) (some funds) to offer access to managers whose funds are closed to new investors.

Question 24

FoFs share in the HF industry

Answer 24

1/4

Question 25

FoFs benefits

Answer 25

1. outsourcing a DD function to a professional FoFs manager
2. selecting from a universe of 7000 HFs with a wide dispersion of returns
3. FoFs provide a value-added through manager selection and diversification
   * however, returns are subjected to a 2nd layer of fees

Question 26

The three primary approaches to a diversified hedge fund portfolio are

Answer 26

1) internal management,
2) multistrategy funds,
3) funds of funds.

Question 27

Internal management

Answer 27

1. for investors who can afford staff and large allocations to single fund
2. retain control of manager selection decisions
3. compare cost to FoFs fees

Question 28

Four Functions of Fund of Funds Management

Answer 28

1. Strategy and manager selection: The FoF manager is responsible for selecting the strategies and the managers that will represent those strategies.
2. Portfolio construction: Once the strategies and managers have been selected, the FoF manager has to decide on how much to allocate to each strategy and manager.
   3.Risk management and monitoring: The FoF manager will monitor each hedge fund to ensure that its performance profile is consistent with the fund’s overall objectives.
   May employ risk management processes or multifactor sensitivity analysis to gauge the risk exposure
3. Due diligence: For hedge fund investing, due diligence is the process of monitoring and reviewing the management and operations of a hedge fund manager.

Question 29

FoFs vs multi strategy fund

Answer 29

1. both are a diversified fund run by a single hedge fund manager.
2. The difference is that a fund of funds allocates its assets amongst other hedge funds and in so doing creates two layers of fees: the fees of the fund of fund’s structure and the fees of the underlying hedge fund investments.

Question 30

gauge smith

Answer 30

изменять оценивать калибрировать

Question 31

Operational due diligence is

Answer 31

the process of evaluating the policies, procedures, and internal controls of an asset management organization.

Question 32

FoFs approach advantage

Answer 32

1. diversification by giving an access to the HF universe universe of event- driven, relative value, macro, and equity strategies.
2. safety in numbers by reducing idiosyncratic risk exposure through single strategy/manager skills
3. professional management of risk and diversification

Question 33

multi strategy fund

Answer 33

1. employ a single fund manager who oversees multiple strategies
2. lower fees than FoFs
3. advantage in tactical and strategy allocation
4. may have an operational risk and less manager choice than FoFs