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1 Quiz 1 ? Hedge Funds Special Topics ? Investments (FINC 6399) Please enter your answers in the Blackboard template. 1. Investors who invest in hedge funds can withdraw their funds A. at anytime. B. during certain windows or "gates" after a lock up period. C. after giving 90 days' notice to the fund. 2. A hedge fund gets its name because A. it always remained hedged and eliminates all types of financial risk. B. it always adopts long and short strategies which offset market risk. C. none of the above. 3. A hedge fund's goal is A. to achieve the maximum absolute return. B. beat a pre?determined benchmark. C. provide the risk free rate of return. 4. Hedge funds, in general, A. avoid the use of financial leverage. B. actively leverage their capital to achieve higher returns. C. minimize risk by lending in debt markets. 5. Which of the following are examples of leveraging a portfolio? A. Borrowing from a bank. B. Short?selling a security. C. All of the above. 6. Institutional investors have increased their investment in hedge funds, private equity, real estate etc. in order to A. achieve higher returns. B. achieve greater diversification. C. all of the above. 7. The share of fund of funds as a proportion of hedge fund investments A. has declined over time. B. has increased over time. C. has remained about the same. 8. The hedge fund industry is A. highly competitive with many small funds and no fund with over 3 percent of total assets. B. highly concentrated with over 60 percent of assets controlled by top ten hedge funds. C. highly regulated which limits the growth of a hedge fund. 2 9. Although controversial, early research showed that A. hedge funds are unable to beat the S&P 500 index over a long period of time. B. hedge funds were able to beat the S&P 500 index and were also less volatile over a long period of time. C. hedge funds were less volatile but did not beat the S&P 500 index. 10. Hedge fund performance measurement suffers from A. back fill bias, survivorship bias, selection bias. B. back fill bias, liquidation, selection bias. C. back fill bias, survivorship bias, selection bias and liquidation bias. 11. During the equity market pullback in 2008?2009 as a result of the housing crisis, hedge funds A. suffered lower losses than the S&P 500 index, or equities in general. B. suffered greater losses than the S&P 500 index, or equities in general. C. did not suffer any losses. 12. Hedge fund trading has led to A. a decline in liquidity around the world. B. an increase in liquidity around the world. C. no change in liquidity around the world. 13. One of the major risks faced by hedge funds is A. lack of liquidity for their investments, especially during times of market crisis. B. nationalization by their respective governments. C. changing interest rates. 14. It has been asserted that "side?pocket" investments may be used by hedge funds to A. improve their reported performance. B. prevent illiquid assets from reducing their compensation. C. all of the above. 15. Hedge funds are comparable to A. private equity investments. B. mutual fund investments. C. common stocks. 16. Fund of funds vehicles A. have all of these attributes. B. have two layers of fees associated with them. C. provide diversification and expert advice with additional "due diligence.". 17. Based on their strategy, hedge funds can NOT be classified as A. macro, event driven and long?short funds. B. macro, long?short, and arbitrage funds. C. perfectly hedged risk free funds. 3 18. Over time, hedge funds have reduced their dependence on A. macro strategies. B. event driven strategies. C. arbitrage strategies. 19. In a long?short strategy, sources of returns are A. performance return. B. performance return and interest rebate. C. performance return, liquidity buffer interest and interest rebate. 20. Long?short strategies may be classified as A. highly speculative. B. market neutral. C. completely risk free. 21. A long?short strategy will always result in A. positive returns. B. negative returns. C. risk free return. D. none of the above. 22. An example of an arbitrage strategy is A. going long in an off the run Treasury security and short in an on the run security. B. going short in an off the run Treasury security and long in an on the run security. C. going long in an off the run Treasury security as well as on the run security. 23. The investment value of a convertible bond is based on A. the bond's cash flows discounted at the market's yield to maturity of an equivalent non?convertible bond. B. the price of the common stock of the issuer. C. the value of the conversion option. 24. The option value of a convertible bond will equal A. the value of the bond if converted into stock at the prevailing stock price. B. the difference between its market value and its investment value. C. the difference between its conversion value and its straight bond (non?convertible) value. 25. If the share price volatility of a company's stock increases, the option value of a convertible bond will A. remain unaffected. B. increase. C. decrease. 26. A convertible bond arbitrage strategy involves A. going long in a convertible bond and short in the underlying shares. B. going short in a convertible bond and long in the underlying shares. C. going short in both a convertible bond and its underlying shares. 4 27. Delta hedging is based on using the option's sensitivity to underlying stock price when establishing the number of A. shares to short sell. B. shares to go long. C. convertible bonds to go short. 28. Relative value arbitrage strategies exploit A. correlation between peer stocks. B. spot and futures price relationships. C. all of the above. 29. Event?driven strategies include all of the following except A. merger events. B. corporate distress. C. change in credit ratings. D. currency devaluations. 30. In merger arbitrage situations, the market is A. unable to distinguish between potentially successful deals those destined to fail. B. able to distinguish between potentially successful deals those destined to fail. C. provides the same arbitrage profit whether the merger deal fails or succeeds. 31. A distressed securities arbitrage strategy is based on all of the following except A. nature of claims and liabilities. B. debt covenants. C. fundamental analysis. D. cause of distress. E. interest rates. 32. A macro strategy is likely to exploit all of the following except A. inflation rates. B. exchange rates. C. stock market indexes. D. merger securities. E. commodities. 33. Activist shareholders are criticized as they may A. lead to a shut down of the normal corporate governance process. B. put undue pressure on boards to maximize their objectives at the expense of other shareholders. C. wrest substantial control from boards. D. do all of the above. 34. Activists shareholders may force companies to A. do all of these. B. pay higher dividends. C. increase stock buybacks. D. sell off divisions. E. spin?off divisions to shareholders in the form of a separate company stock. 5 35. Private equity fund activism increases when A. access to debt is limited to the funds. B. access to debt is easily available to the funds. C. the stock market is in turmoil. 36. An activist shareholder can use of the following to increase its returns A. debt financing. B. equity swaps. C. all of the above. 37. An equity collar can be created with the help of A. call and put options on stock. B. call options only. C. put options only. 38. Equity swaps can be used to A. accumulate economic interest beyond the 13D filing disclosure requirement of the securities laws. B. increase exposure to equities without owning them directly. C. force the counterparty that pays the total return on equity to vote according to the receiver's wishes. D. All of the above. E. A and B. 39. Which of the following is not a source of risk to a hedge fund? A. Changing regulations. B. Lack of liquidity. C. Leverage risk. D. Threat of takeover. E. Legal risk. F. Systemic risk. 40. According to hedge fund studies, new hedge fund managers A. lag established fund managers in performance. B. lead established fund managers in performance. C. and established hedge fund managers shown about the same level of performance. 41. Fund of funds may carry greater risk than their underlying funds due to A. legal restrictions. B. compounding of leverage risk. C. threat of regulatory disclosure requirements. 42. Hedge funds are facing increased difficulty marketing themselves as A. absolute return funds. B. opportunities for diversification. C. lower volatility investments. 6 43. A high?water mark approach to hedge fund compensation is based on the concept of A. trying to achieve the highest return every period. B. cumulative performance in order to protect passive investors. C. reducing losses to the hedge fund. 44. Which of the following is NOT a hedge fund classification? A. Macro fund B. Speculative fund C. Market?neutral fund 45. Which of the following is NOT a drawback of fund of funds investing? A. Higher fees B. Difficulty in measuring performance C. Diversification 46. Nature of a hedge fund A. is easy to define because they can be grouped according to their investment objectives and strategies. B. can be defined according to its fee structure but not its legal structure. C. can only be defined according to its legal and fee structure. 47. Which of the following is NOT a risk associated with hedge funds? A. Short squeeze. B. Counterparty risk. C. Mismatch of entrepreneurs and management.