Questions - Part 1

Question 1

Dodd-Frank Act Purpose

Answer 1

The Dodd-Frank Act was enacted to promote the financial stability of the U.S. by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Question 2

Manager in the EU

Answer 2

If a manager seeks to conduct business within the European Union, they are subject to a single regulatory scheme, as long as the manager is domiciled in one of its member states.

Question 3

Differences between UCITS and AIFs

Answer 3

1) UCITS are generally for retail investors with small investment amounts while AIFs are for investors with higher investments

2) UCITS are restricted to safe and liquid assets while AIFs have fewer investment restrictions

3) UCITS limit leverage while AIFs can use reasonable levels of leverage

Question 4

Two methods available to fund managers to engage in the marketing of AIFs by AIFMs

Answer 4

1) Using a marketing passport available under the AIFMD

2) Marketing in a specific EU member country in accordance with that country’s private placement regime

Question 5

Duties of the Securities and Futures Ordinance (SFO) and the Securities and Futures Commission (SFC) in Hong Kong.

Answer 5

The Securities and Futures Ordinance (SFO) is the primary legislation for the regulation of asset management activity in Hong Kong. The Securities and Futures Commission (SFC) is the regulator responsible for overseeing the SFO in Hong Kong.

Question 6

Three situations would a fund manager not be required to obtain a capital markets services (CMS) license in Singapore?

Answer 6

1) It carries on fund management in Singapore on behalf of not more than 30 qualified investors, (of which not more than 15 may be funds or limited partnerships).

2) The total value of the assets managed does not exceed a specific amount set out in the regulations.

3) It is registered with the Monetary Authority of Singapore (MAS) as a registered fund management company (RFMC).

Question 7

The role of the Financial Supervisory Service (FSS) in South Korea

Answer 7

The Financial Supervisory Service (FSS) in South Korea is responsible for inspection of financial institutions as well as enforcement of relevant regulations as directed by the FSC.

Question 8

Motivations for ESG adoption amongst institutional investors (4x)

Answer 8

1) Increasing risk-adjusted returns

2) Reducing reputational risk

3) Address stakeholder concerns

4) Doing the right thing or improving the planet

Question 9

Challenges faced by institutional investors regarding ESG (3)

Answer 9

ESG Adoption

Lack of Standards

Cost

Question 10

Environmental Stewardship for ESG in RE

Answer 10

Buildings and construction activity account for 36% of global final energy use and are responsible for 39% of global carbon emissions. Both also can create significant amounts of waste.

Question 11

Key rationales behind ESG adoption amongst hedge fund managers? (4)

Answer 11

1) Regulation

2) Risk management,

3) Client demand,

4) New potential sources of alpha.

Question 12

Open Protocol Hedge Fund Reporting

Answer 12

The Open Protocol Hedge Fund Report was created to bridge investors’ needs for risk and portfolio metrics and the need of hedge funds to maintain some level of privacy around detailed data. The Protocol provides a standard and consistent framework around data and inputs, calculations and methods, timely and regular report, and protocols and standards.

Question 13

Short Selling (argument for and against)

Answer 13

Proponents of short-selling claim that it provides a vital function in the marketplace, as it dampens the potential for over-priced securities or prevents and punishes corporate fraud and mismanagement.

Arguments against short-selling claim that short-sellers hope for price declines, which is harmful to market sentiment and could potentially increase market volatility.

Question 14

Goals of the Global Reporting Initiative (GRI) and the Global Reporting Initiative Standards

Answer 14

GRI seeks to help businesses and governments worldwide understand and communicate their impact on critical sustainability issues such as climate change, human rights, governance and social well-being.

The GRI standards are meant to enable all organizations to report publicly on their economic, environmental, and social impacts – and show how they contribute towards sustainable development. The standards also serve as a reference for policy makers and regulators.

Question 15

Purpose of the United Nations’ 17 Sustainable Development Goals (SDG)

Answer 15

The United Nations published a list of 17 goals to “improve the plight of the human race,” seeking to improve incomes, living conditions, and reduce poverty and inequality worldwide while stalling or reversing the impact of climate change.

Question 16

Conflict between the principals of ESG and Fiduciary Responsibility in the United States

Answer 16

Under the Investment Advisers Act of 1940, fiduciary duties cannot conflict with the clients’ best interest. Therefore, there is a potential conflict in that ESG matters may not always result in a direct financial benefit, such as improved risk-adjusted returns. Unless explicitly directed by the investor, fiduciaries in the US are directed to only invest with the goal of maximizing returns relative to the financial risk constraints of the client.

Question 17

Regulatory attitudes with ESG implementation across the Globe?

Answer 17

In the United States, the U.S. Department of Labor stated that fiduciaries may consider ESG issues while investing, but only if those issues are directly relevant to the return, risk, and economic outlook of each investment. In other words, financial risk and return comes first, ESG issues second.

European regulation is increasingly supporting mandatory disclosure of ESG-related issues, but regulation beyond that is somewhat unclear.

In Asia, there are also few requirements. Hong Kong is slightly ahead of other Asian countries, in that the Securities and Futures Commission announced The Hong Kong Strategic Framework for Green Finance in 2018.

Question 18

Proxy Voting vs Active Management

Answer 18

An engagement strategy is when an investor takes a long position in the stock of a company and seeks to influence the company’s agenda on how to improve the ESG standing of the company. Proxy voting, however, is more passive than an engagement strategy. Proxy voting deals with issues specifically put for election by management and does not go beyond the agenda of management.

Question 19

Coase Theorem

Answer 19

Coase asserts that whether the law sides with shareholders who claim a right to generate negative externalities or with the victims of negative externalities will not interfere with the ability of the parties to negotiate the most efficient resolution to the dispute so that they can share in the net benefits (or least costs).

Question 20

Model Types

(Theoretical and Normative)

Answer 20

The descriptions are as follows:

Theoretical models tend to explain behavior accurately in more simplified situations where the relationships among variables can be somewhat clearly understood through logic.

Normative economic models tend to be most useful in helping explain underlying forces that might drive rational financial decisions under idealized circumstances and, to a lesser extent, under more realistic conditions.

Time-series models analyze behavior of a single subject or a set of subjects through time.

For example, a model that hypothesized the impact of large orders in an equity market with risk-averse traders of limited capital in a world of informational asymmetries in which the large orders were driven by exogenous shocks to the institutions placing the orders would qualify.

Question 21

Ho-Lee Model Disadvantages

Answer 21

The main disadvantages of the Ho and Lee model are that interest rates can be negative and that it assumes a very simple binomial process for bond prices.

Question 22

Five determinants of Altman’s Z-Score.

Answer 22

The five determinants of Altman’s Z-Score are:

1) Working Capital/Total Assets.

2) Retained Earnings/Total Assets.

3) Earnings before Interest and Taxes/Total Assets.

4)Market Value of Equity/Book Value of Total Liabilities.

5)Sales/Total Assets.

Question 23

Multi-factor models have over single-factor models

Answer 23

Multi-factor models tend to explain systematic returns much better than do single-factor models. By doing so, multi-factor models are generally believed to produce better estimates of idiosyncratic returns.

Question 24

Empirical Factor Model Steps (3x)

Answer 24

1) Risk-free rate is subtracted from the returns of each security to form an excess return, which is used as the dependent variable;

2) the researcher selects a set of potential factors that serve as independent variables;

3) statistical analysis is used to identify those factors that are significantly correlated with returns.

Question 25

Three challenges associated with empirical multi-factor models

Answer 25

1) False identification of factors,

2) Factor return correlation vs. causation,

3) Justifying why the CAPM may not be sufficient.

Question 26

Factor Investing (Ang)

Answer 26

Factors matter, not assets;

Assets are bundles of factors;

Different investors should focus on different factors.

Question 27

Four practical implications of an adaptive view on markets

Answer 27

1) The tradeoff between risk and return is not stable over time and risk premiums can be predicted based on technical and fundamental variables

2) Market efficiency is a relative concept instead of an absolute one, and a market displays varying degrees of efficiency depending on the point in time and the participant.

3) It is necessary to use adaptable investment approaches to handle changes in the market environment.

4) Alpha becomes beta due to innovation and competition.

Question 28

Hypothetical Return

Answer 28

Monte Carlo