Which of the following categories of hedge fund strategies would volatility strategies most likely be classified under?

Over time, compared to traditional stock and bond investments, the commodities asset class has exhibited:

lower returns and higher price volatility.

Returns on commodities over time have been lower than returns on global stocks or bonds, and price volatility has been higher.

An equity hedge fund that uses technical analysis techniques to identify undervalued shares to buy and overvalued shares to sell short is best described as pursuing a(n):

quantitative directional strategy.

Quantitative directional strategies employ technical analysis and may have net long or short exposure. A market neutral strategy maintains approximately equal values in long and short positions and is typically based on fundamental analysis. Special situations strategy is an event-driven strategy that involves investing in firms that are selling divisions or assets, distributing capital, or issuing or repurchasing securities.

Private investments in public equities (PIPEs) are most likely examples of which of the following private equity investment strategies?

Minority equity investing

Private investments in public equities (PIPEs) are examples of development capital or minority equity investing where more mature companies seek private equity capital.

Which provision of a hedge fund’s incentive fees is designed to prevent investors from paying multiple incentive fees for the same performance?

High water mark.

If a hedge fund has a high water mark, incentive fees are based on increases in investors’ accounts above their highest previous values. As a result, fund managers do not receive incentive fees on returns that reverse previous losses. A hurdle rate is a minimum return a fund must achieve in a given period before fund managers receive incentive fees. A 2-and-20 structure means fund managers receive a 2% management fee and a 20% incentive fee; other provisions determine the base amounts on which these fees are calculated.

Which of the following statements with respect to hedge fund investing is least accurate?

Survivorship bias in hedge fund data causes risk to be overstated because funds that take on more risk tend to have higher returns.

Because a hedge fund database only includes the more stable funds that have survived, the risk measure of hedge funds as an asset class is biased downward.

Compared with purchasing commodities, long positions in commodity derivatives offer the benefit of:

no storage costs.

While commodity futures retain the risk and correlation characteristics of the underlying commodities, the investor docs do not incur storage costs. Derivatives cannot have a higher correlation with spot prices than the commodity itself, as its price is the spot price. Convenience yield is a benefit of owning the actual commodities.

Compared to investing in commodities, investing in farmland is most likely to provide which of the following benefits?

Higher income.

Investing in farmland may provide income over the life of the investment from crops produced and sold. Investing in commodities typically does not provide income. Commodities and real estate investments such as farmland may both provide a hedge against inflation. Direct investments in real estate are less liquid than investments in commodities, which are typically made through highly liquid exchange-traded derivatives.

Which of the following strategies is most likely to be pursued by a private equity fund?

Use debt financing to acquire control of a publicly traded firm.

Leveraged buyouts are the predominant activity pursued by private equity funds. Convertible arbitrage and activist shareholder strategies are more typically associated with hedge funds.

Distressed investing is least likely an example of:

Real estate strategies.

Private equity strategies include LBOs, venture capital, development capital, and distressed investing. Distressed investing is also a hedge fund strategy that falls under event-driven strategies.

Which of the following is least likely a benefit of fund of funds (FOF) investing?

The fee is generally quite reasonable since the investor only pays the manager of the FOF.

The fee may actually be substantial since, in addition to paying the manager of the FOF, a fee must be paid to each hedge fund within the FOF.

A leveraged buyout firm that carries out a secondary sale has:

exited an investment in a portfolio company.

In a secondary sale, a private equity firm sells one of its portfolio companies to a group of investors or another private equity firm.

Compared to traditional investment managers who invest in long-only stocks and bonds, alternative investment managers typically invest in assets that are:

less regulated, less transparent, and less liquid.

Compared to traditional investments, alternative investments exhibit less liquidity, less regulation, and less transparency. As a group, alternative investments generally have relatively low return correlations with traditional investments.

A hedge fund that requires incentive fees to be calculated only on the portion of returns above a benchmark return is said to have a:

hard hurdle rate.

In a hedge fund’s fee structure, a hard hurdle rate means that incentive fees are earned only on returns in excess of the benchmark return. A soft hurdle rate means that incentive fees are calculated on the entire return, but are only paid if the return exceeds the hurdle rate. A high water mark specifies that incentive fees are only paid on returns that increase an investors account value above its highest previous value.

Compared to brownfield infrastructure investments, greenfield infrastructure investments are more appropriate for investors with:

longer time horizons and lower liquidity needs.

Greenfield investments are infrastructure projects that have not yet been built. Compared to brownfield investments, which are infrastructure assets that already exist, greenfield investments are more appropriate for investors with longer time horizons. Greenfield investments have greater risk than brownfield investments. Direct investments in infrastructure of either type are illiquid.

Which of the following categories of hedge fund strategies would volatility strategies most likely be classified under?

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