Hedge funds

Question 1

What are the 2 investment objectives of hedge funds?

Answer 1

Absolute return with limited volatility i.e higher risk adjusted rates of return

limited/negative correlation with markets

Question 2

2 tools used by hedge funds

Answer 2

Derivatives and leveraging

Question 3

3 features of hedge funds

Answer 3

Expensive

Often offshore

Non reporting so liable to income tax

Question 4

4 hedge fund strategies

Answer 4

long/short - long investments with short sales of single investments and derivatives

Relative value - No market related element, rely on arbitrage. Limited volatility but liquidity can dry up

Event driven - Use price movements from anticipated corporate activity. Limited volatility but strong markets have more CA

Tactical trading - Trade currency, bonds, equity, commod etc.

Question 5

Purpose and feature of FOHF

Answer 5

Employ a company to do research and diversify

Performance fee

Question 6

Give 3 returns of hedge funds

Answer 6

Focus on absolute return

Aim for above average return using skill

Potential outperformance in downturns

Question 7

Give 6 risks of hedge funds

Answer 7

Gearing
Investment
Manager
Liquidity
Encashment
Regulatory

Question 8

Give 3 advantages and 4 disadvantages of hedge funds

Answer 8

Diversification
Low Volatility
Expertise

Lack of regulation
High min investment
Complex
Volatility/collapse