Hedge Funds

Question 1

What are Hedge Funds?

Answer 1

Lightly regulated pools of capital whose managers have great flexibility in their investment strategies

Take short positions, use derivatives for leverage and speculation, perform arbitrage transactions and invest in almost any situation in any market

Question 2

Alternative Investment Options

Answer 2

Real Estate, commodities, private equity (securities that are not publicly listed)

Question 3

Hedge Fund Structure: Relative Value Strategies

Answer 3

Attempt to profit by exploiting inefficiencies or differences in the pricing of related stocks, bonds or derivatives in different markets

Low or not exposure to the underlying market direction. Their returns are due to the manger’s skill in identifying mis-priced securities

Question 4

Hedge Fund Structure: Event-Driven Strategies

Answer 4

Seek to profit from unique events

Medium exposure to the underlying market direction

Question 5

Hedge Fund Structure: Directional Strategies

Answer 5

Be on anticipated movements in the market prices of equities, debt securities, foreign currencies and commodities.

High exposure to trends in the underlying market. Involves predicting and understanding the opportunities

Question 6

Hurdle Rate

Answer 6

The rate that a hedge fund must earn before its manager receives an incentive fee

Question 7

Advantages to Hedge Funds

Answer 7

Focus on Absolute and not Relative Returns: seek to achieve positive returns in any market condition

Lower Correlation with Traditional Asset Classes: low correlation to the returns on traditional asset classes such as equity and debt securities. If maintained over time these funds can provide diversification benefits and help lower over all portfolio risk

Potential for Lower Volatility and Higher Returns: different strategies and opportunity to use derivatives and short sell securities give hedge funds a greater potential to earn higher returns

Question 9

Risks of Hedge Funds

Answer 9

Light Regulatory Oversight: not required by securities laws to provide the comprehensive initial and ongoing information associated with securities offered through a prospectus

Market Risk: first order risk is the risk associated with the direction of interest rates, equities, currencies and commodities

Liquidity Constraints: typically not able to liquidate their portfolios on short notice

Investment Strategy Risk: investors may not fully understand the techniques being used