Hedge Funds

Question 0

Can use ________ to separate alpha and beta hedge fund return

Answer 0

Regression analysis

Ensure no omitted factors

Question 1

What are added risks of a hedge fund compared to mutual fund

Answer 1

Higher leverage 
Potential use of derivatives 
Low disclosure requirements 
Long lock up periods 
Higher fee structure includes incentive 
Only qualified investors 
Los liquidity

Question 2

What is used to measure hedge fund risk and why?

Answer 2

Skewness and kurtosis

Want it to be positive skewness and low kurtosis

(Use these due to non normal distribution so st dev isn’t sufficient)

Question 3

Why must unconstrained mean variance optimization be adjusted for hedge funds?

Answer 3

Leads to disproportionately high allocation to hedge fund as:

Exp returns tough to predict
St dev misleading
Dynamic correlations

Question 4

Is it possible to replicate hedge fund and what are benefits?

Answer 4

Yes, if returns are explained by exposure to conventional investments

Can overcome limitations s.as cost, illiquidity, transparency, alpha

Question 5

What are funds of funds used for? Benefits/drawbacks

Answer 5

Add diversification 
Add due diligence 
Better liquidity 
Lower min investment   
Lower st dev 

Similar return to single mgr fund
Add layer of fees