CFA Level 1 - Alternative Investments Session 18 - Reading 74 LOS - i

CFA Level 1 - Alternative Investments Session 18 - Reading 74 LOS - i (Notes, Practice Questions, Sample Questions) 1. Which of the following statements describing hedge funds is least accurate? Most hedge funds: A) use hedging techniques to reduce risk. B) are exempt from most securities regulations.C) are available to only a limited number of qualified investors. <Explanation> (A) The term “hedge fund” is an inaccuratedescription of the investment class because these funds may ormay not employ hedging techniques. Most hedge funds areorganized so as to remain exempt from most securitiesregulations. Participation typically requires a large minimuminvestment and is limited to small numbers of qualifiedinvestors 2. To avoid most SEC regulations, hedge funds organized in the United States typically operate within all of the followingguidelines EXCEPT hedge: A) funds may accept a maximum number of investors. B) fund investments by individuals are limited to a maximum of$500,000. C) fund managers are prohibited from advertising or marketingthe fund.

<Explanation> (B) Hedge funds organized under section 3(c) (7)of the Investment Company Act may not advertise, must limitthe number of investors to 500, and may only accept “qualified”investors, as defined by the Act. Hedge funds investments arenot subject to a maximum amount 3. Managers of hedge funds are typically compensated by: A) an incentive fee, paid only if performance exceeds a “highwater mark”. B) a base management fee, based on the value of assets undermanagement, plus an incentive fee, based on profits. C) a management fee, based on the net change in value of theassets during the year <Explanation> (B) Typical arrangements pay the manager abase fee, usually around 1% of assets, plus an incentive feeproportional to profits 4. Hedge funds operating in the United States that abide by certain guidelines: A) can utilize certain hedging strategies. B) gain exemption from most SEC regulations. C) may advertise to “accredited” investors <Explanation> (B) Hedge funds may not engage in advertisingof any kind. Hedge funds may or may not utilize hedgingstrategies. The main reason for hedge funds to organize undersection 3(c)(1) is to gain exemption from most SEC regulations

5. Hedge funds are usually classified by the media and hedge fund databases according to their: A) past performance. B) investment strategy. C) legal structure <Explanation> (B) The past performance of a hedge fund andlegal structure are typically not criteria used in classifyinghedge funds. Hedge funds are usually classified investmentstrategy, although the system is somewhat subjective and thereis substantial overlap between categories 6. Which of the following statements regarding hedge funds is least accurate? A) Global macro funds make bets on the direction of a market,currency or interest rate. B) Long/short funds have a net market neutral position. C) Market-neutral hedge funds may have long and/or shortpositions <Explanation> (B) Long/short funds, by definition, are notmarket-neutral and usually maintain a net positive or netnegative market exposure 7. The largest category of hedge funds in terms of asset size is: A) market-neutral funds. B) long/short funds. C) global macro funds.

<Explanation> (B) Long/short funds are considered to be the“traditional” type of hedge funds, and they represent thelargest category of hedge funds 8. A hedge fund that takes perfectly o setting long and short positions is best described as a(n): A) market-neutral fund. B) long/short fund.C) event-driven fund. <Explanation> (A) Market-neutral funds take long and shortpositions but attempt to o set them to hedge against marketmoves. Long/short funds take both long and short positions butdo not try to o set them. Event-driven funds focus on uniquemarket opportunities, not o setting positions