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Question 1 of 30
1. Question
For which of the following reasons does a fund of hedge funds invest not in any underlying security but in a portfolio of hedge funds?
Correct
A fund of hedge funds, as the name suggests, invests in a portfolio of hedge funds not in any underlying security, in order to minimize idiosyncratic risk. Funds of hedge funds select hedge fund managers and construct portfolios based upon those selections.
Incorrect
A fund of hedge funds, as the name suggests, invests in a portfolio of hedge funds not in any underlying security, in order to minimize idiosyncratic risk. Funds of hedge funds select hedge fund managers and construct portfolios based upon those selections.
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Question 2 of 30
2. Question
Which of the following is a strategy that involves buying the index, selling calls to give up some of the potential upside gains, and buying puts to protect against the potential losses on the long index position?
Correct
The split strike convergence is a strategy that involves buying the index, selling calls to give up some of the potential upside gains, and buying puts to protect against the potential losses on the long index position. Madoff’s strategy simply termed as ‘‘split-strike convergence,’’ simply means buying the S&P 100 index and giving up some of the upside for downside protection.
Incorrect
The split strike convergence is a strategy that involves buying the index, selling calls to give up some of the potential upside gains, and buying puts to protect against the potential losses on the long index position. Madoff’s strategy simply termed as ‘‘split-strike convergence,’’ simply means buying the S&P 100 index and giving up some of the upside for downside protection.
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Question 3 of 30
3. Question
A high-net-worth individual is a term used by some segments of the financial services industry to designate persons whose investible wealth exceeds a given amount. The definition of a high net worth individual is dependent on which of the following factors?
I. Geography
II. Nationality
III. Family
IV. Passage of timeCorrect
The definition of a high net worth individual is highly fluid and changes with geography, nationality, and passage of time. Every country has its own regulations. Although there is no precise definition of how rich someone must be to fit into this category, high net worth is generally quoted in terms of having liquid assets of a particular number.
Incorrect
The definition of a high net worth individual is highly fluid and changes with geography, nationality, and passage of time. Every country has its own regulations. Although there is no precise definition of how rich someone must be to fit into this category, high net worth is generally quoted in terms of having liquid assets of a particular number.
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Question 4 of 30
4. Question
An accredited or sophisticated investor is an investor with a special status under financial regulation laws. Which of the following correctly defines an accredited investor?
I. An individual who has a net worth greater than $1 million only.
II. An individual who has a net worth greater than $1 million and has an income in the past two years that exceeds $200,000 a year and expects to continue this way.
III. An individual who holds assets greater than $5 million.
IV. An individual who holds assets less than $5 million.Correct
An accredited investor is an individual who either has a net worth greater than $1 million and has an income in the past two years that exceeds $200,000 a year and expects to continue this way or holds assets greater than $5 million. An accredited investor is a person or institution that meets certain requirements for the purpose of purchasing securities that are not offered to the general public.
Incorrect
An accredited investor is an individual who either has a net worth greater than $1 million and has an income in the past two years that exceeds $200,000 a year and expects to continue this way or holds assets greater than $5 million. An accredited investor is a person or institution that meets certain requirements for the purpose of purchasing securities that are not offered to the general public.
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Question 5 of 30
5. Question
Which of the following tests must wealthy individuals pass to qualify and to be classified as high net worth individuals (HNWIs)?
I. An accredited investor test
II. A stress test
III. A congressional achiever test
IV. A qualified purchaser testCorrect
A high-net-worth individual (HNWI) is a person with liquid assets above a certain figure. Wealthy individuals must pass either an accredited investor test or a qualified purchaser test to qualify to be high net-worth individuals.
Incorrect
A high-net-worth individual (HNWI) is a person with liquid assets above a certain figure. Wealthy individuals must pass either an accredited investor test or a qualified purchaser test to qualify to be high net-worth individuals.
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Question 6 of 30
6. Question
Which of the following statements accurately describes a qualified purchaser?
I. A community with an annual total of at least $10 million in investments.
II. A business that has discretion of at least $25 million in investments.
III. A family-held business that owns at least $5 million in investments.
IV. An individual who owns at least $5 million in investments.Correct
A qualified purchaser is defined as either of the following:
– An individual who owns at least $5 million in investments.
– A family-held business that owns at least $5 million in investments.
– A business that has discretion of at least $25 million in investments.
– A trust that is sponsored by qualified purchasers.Incorrect
A qualified purchaser is defined as either of the following:
– An individual who owns at least $5 million in investments.
– A family-held business that owns at least $5 million in investments.
– A business that has discretion of at least $25 million in investments.
– A trust that is sponsored by qualified purchasers. -
Question 7 of 30
7. Question
The ultra-wealthy, known as ultra-high-net-worth individuals (UHNWIs), make up a group of people who have net worths of at least $30 million. The ultra-rich individual investors who have assets higher than $50 million tend to create family offices. What is the basic goal of every family office?
Correct
The basic goal of every family office is to pool the resources of an extended family under one umbrella to achieve higher levels of wealth management. The family office uses in-house as well as outsourced resources to meet the financial goals as well as the tax obligations of the family.
Incorrect
The basic goal of every family office is to pool the resources of an extended family under one umbrella to achieve higher levels of wealth management. The family office uses in-house as well as outsourced resources to meet the financial goals as well as the tax obligations of the family.
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Question 8 of 30
8. Question
The ultra-rich individual investors who have assets higher than $50 million tend to create family offices. Which of these is part of the purposes that these family offices serve?
I. Obtaining wealth from a cultural perspective.
II. Managing wealth from a return perspective.
III. Managing wealth from a tax perspective.
IV. Securing wealth from a personal view.Correct
Family offices serve the dual function of managing the wealth from a return as well as a tax perspective. These family offices then decide to invest in traditional equity and bond markets as well as in the alternative investment space of hedge funds.
Incorrect
Family offices serve the dual function of managing the wealth from a return as well as a tax perspective. These family offices then decide to invest in traditional equity and bond markets as well as in the alternative investment space of hedge funds.
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Question 9 of 30
9. Question
Hedge funds are vehicles that can provide diversified excess market returns. Which of the following large institutional investors are usually termed as the end-investors into hedge funds?
Correct
Pension funds, high net worth individuals (HNWs), banks, and endowments are usually termed as the end-investors into hedge funds. These are large institutional investors that have billions of dollars to deploy and often define the investment trends of the future.
Incorrect
Pension funds, high net worth individuals (HNWs), banks, and endowments are usually termed as the end-investors into hedge funds. These are large institutional investors that have billions of dollars to deploy and often define the investment trends of the future.
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Question 10 of 30
10. Question
Which of the following are nontaxable vehicles established to contribute toward the future funding requirements of colleges and universities?
Correct
U.S. endowment funds are nontaxable vehicles established to contribute toward the future funding requirements of colleges and universities. The university endowments raise money from a combination of legacies, gifts, and government grants. They also rely on prudently deploying this capital to generate superior investment returns.
Incorrect
U.S. endowment funds are nontaxable vehicles established to contribute toward the future funding requirements of colleges and universities. The university endowments raise money from a combination of legacies, gifts, and government grants. They also rely on prudently deploying this capital to generate superior investment returns.
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Question 11 of 30
11. Question
Which of the following is an investment strategy, popular with hedge funds, that seeks to take a long position in underpriced stocks while selling short overpriced shares?
Correct
Alfred Jones started his first hedge fund trading equities, where he would buy some stocks and sell short some other stocks. This strategy came to be known as the Long/Short Equity strategy. Long/short equity is an investment strategy that seeks to take a long position in underpriced stocks while selling short overpriced shares.
Incorrect
Alfred Jones started his first hedge fund trading equities, where he would buy some stocks and sell short some other stocks. This strategy came to be known as the Long/Short Equity strategy. Long/short equity is an investment strategy that seeks to take a long position in underpriced stocks while selling short overpriced shares.
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Question 12 of 30
12. Question
Which of the following terms refers to analyzing markets in greater depth by studying interest rate yield curves, volatility cubes, and correlations between related markets and securities to determine cheapness?
Correct
Analyzing markets in greater depth by studying interest rate yield curves, volatility cubes, and correlations between related markets and securities to determine cheapness is referred to as relative value analysis refers. This analysis almost exclusively involves derivative instruments like options, futures, and swaps.
Incorrect
Analyzing markets in greater depth by studying interest rate yield curves, volatility cubes, and correlations between related markets and securities to determine cheapness is referred to as relative value analysis refers. This analysis almost exclusively involves derivative instruments like options, futures, and swaps.
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Question 13 of 30
13. Question
A global macro strategy is a hedge fund or mutual fund strategy. Which of the following statements is accurate for a global macro strategy?
Correct
Global macro entails a global, top-down analysis of the macroeconomic conditions. It bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles. Global macro funds build portfolios around predictions and projections of large-scale events on the country-wide, continental, and global scale, implementing opportunistic investment strategies to capitalize on macroeconomic and geopolitical trends.
Incorrect
Global macro entails a global, top-down analysis of the macroeconomic conditions. It bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles. Global macro funds build portfolios around predictions and projections of large-scale events on the country-wide, continental, and global scale, implementing opportunistic investment strategies to capitalize on macroeconomic and geopolitical trends.
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Question 14 of 30
14. Question
Some managers rely solely on predicting market price movements based on systems. Which of the following terms best refers to the art of predicting market price movements based on systems?
Correct
The art of predicting market price movements based on systems is referred to as systematic trading. Systematic trading is highly mathematical and the trading decisions are made by computer-based algorithms rather than human intervention.
Incorrect
The art of predicting market price movements based on systems is referred to as systematic trading. Systematic trading is highly mathematical and the trading decisions are made by computer-based algorithms rather than human intervention.
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Question 15 of 30
15. Question
Fixed-income arbitrage is an investment strategy that is primarily used by hedge funds and investment banks. Which of the following statements best describes the investment strategy – fixed-income arbitrage strategy?
Correct
A fixed-income arbitrage strategy refers to exploiting pricing inefficiencies between related fixed-income securities. Fixed-income arbitrage seeks to profit from temporary price differences that may occur in bonds and other interest-rate securities. This kind of arbitrage can be risky unless the issues are extremely similar.
Incorrect
A fixed-income arbitrage strategy refers to exploiting pricing inefficiencies between related fixed-income securities. Fixed-income arbitrage seeks to profit from temporary price differences that may occur in bonds and other interest-rate securities. This kind of arbitrage can be risky unless the issues are extremely similar.
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Question 16 of 30
16. Question
A government bond is a bond issued by a national government, generally with a promise to pay periodic interest payments called coupon payments and to repay the face value on the maturity date. Which of the following terms refers to a relative value between government bonds of different maturities?
Correct
Relative value between government bonds of different maturities is referred to as the yield curve relative value. Yield curve relative value is a subset of the relative value arbitrage strategy.
Incorrect
Relative value between government bonds of different maturities is referred to as the yield curve relative value. Yield curve relative value is a subset of the relative value arbitrage strategy.
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Question 17 of 30
17. Question
Which of the following is a relative value hedge fund manager likely to do in order to determine cheap or expensive securities?
I. Analyze yield curves between securities.
II. Analyze regularity cubes between securities.
III. Analyze correlation matrices between securities.
IV. Analyze historical spreads between securities.Correct
In order to determine cheap or expensive securities, the relative value hedge fund manager will analyze the following:
– Yield curves between securities.
– Volatility cubes between securities.
– Correlation matrices between securities.
– Historical spreads between securities.Incorrect
In order to determine cheap or expensive securities, the relative value hedge fund manager will analyze the following:
– Yield curves between securities.
– Volatility cubes between securities.
– Correlation matrices between securities.
– Historical spreads between securities. -
Question 18 of 30
18. Question
The relative value hedge fund manager will analyze yield curves, volatility cubes, correlation matrices, and historical spreads between securities to determine cheap or expensive securities. After determining cheap and expensive securities, which of the following is a relative value hedge fund manager not likely to do?
I. Take a long position in cheap securities.
II. Take a short position in expensive securities.
III. Take a short position in cheap securities.
IV. Take a long position in expensive securities.Correct
After determining cheap and expensive securities, a relative value hedge fund manager will then take a long position in the cheap security and a short position in the expensive security. Doing this means that he is betting that the short-term dislocation in prices is a manifestation of the supply and demand flows and that the market will soon return to some level of equilibrium.
Incorrect
After determining cheap and expensive securities, a relative value hedge fund manager will then take a long position in the cheap security and a short position in the expensive security. Doing this means that he is betting that the short-term dislocation in prices is a manifestation of the supply and demand flows and that the market will soon return to some level of equilibrium.
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Question 19 of 30
19. Question
Which of the following refers to the relative value between stocks of two companies in the same sector?
Correct
Equity market neutral refers to the relative value between stocks of two companies in the same sector. Equity-market-neutral is a hedge fund strategy that seeks to exploit investment opportunities unique to some specific group of stocks while maintaining a neutral exposure to broad groups of stocks.
Incorrect
Equity market neutral refers to the relative value between stocks of two companies in the same sector. Equity-market-neutral is a hedge fund strategy that seeks to exploit investment opportunities unique to some specific group of stocks while maintaining a neutral exposure to broad groups of stocks.
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Question 20 of 30
20. Question
Which of the following refers to the relative value between a stock and the embedded value of a stock option in the company’s convertible bond?
Correct
The relative value between a stock and the embedded value of a stock option in the company’s convertible bond is referred to as convertible arbitrage. Convertible arbitrage is a trading strategy that typically involves buying a convertible security and selling the underlying common stock.
Incorrect
The relative value between a stock and the embedded value of a stock option in the company’s convertible bond is referred to as convertible arbitrage. Convertible arbitrage is a trading strategy that typically involves buying a convertible security and selling the underlying common stock.
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Question 21 of 30
21. Question
A hedge fund manager has to decide on a law firm to draw up his legal documents. For which of the following reasons would a fund manager hire a reputable legal firm?
I. To help with drafting operating agreements, marketing arrangements, trading documentation, exchange listing, internet usage.
II. To help in setting up the hedge fund legal structure.
III. To audit the fund’s performance numbers.
IV. To handle tax and ERISA matters.Correct
A fund manager hires a reputable legal firm to help with the following:
– Setting up the hedge fund legal structure.
– Complying with securities and derivatives regulatory matters.
– Drafting operating agreements, marketing arrangements, trading documentation, exchange listing, internet usage.
– Handling tax and ERISA matters.Incorrect
A fund manager hires a reputable legal firm to help with the following:
– Setting up the hedge fund legal structure.
– Complying with securities and derivatives regulatory matters.
– Drafting operating agreements, marketing arrangements, trading documentation, exchange listing, internet usage.
– Handling tax and ERISA matters. -
Question 22 of 30
22. Question
A hedge fund trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio construction, and risk management techniques to improve performance. Which of the following defines the success of a hedge fund?
I. The increasing number of hedge funds.
II. The manager’s ability to pick the appropriate service providers.
III. The decreasing number of hedge funds.
IV. The expertise of the manager.Correct
An investment manager wishing to start a hedge fund will need the right mix of trading success, industry experience, and business know-how in order to make it as a hedge fund manager in what has become a highly competitive industry. The success of a hedge fund is defined by the following:
– The expertise of the manager.
– The manager’s ability to pick the appropriate service providers.Incorrect
An investment manager wishing to start a hedge fund will need the right mix of trading success, industry experience, and business know-how in order to make it as a hedge fund manager in what has become a highly competitive industry. The success of a hedge fund is defined by the following:
– The expertise of the manager.
– The manager’s ability to pick the appropriate service providers. -
Question 23 of 30
23. Question
Some hedge fund managers are unable to raise enough capital from their previous employers or through the usual friends and family network. When this happens, what other choices are these fund managers left with?
I. Approaching one of the several commercial seeders.
II. Get capital from a previous employer.
III. Pool funds from friends and family network.
IV. Starting with a very small amount of capital.Correct
A typical hedge fund manager will usually start out with $25 million to $50 million. He will use his own savings, raise capital from friends and family, as well as from his previous employer. If they are unable to raise enough capital from their previous employers or through the usual friends and family network, these managers have the choice of starting with a very small amount of capital or approaching one of the several commercial seeders.
Incorrect
A typical hedge fund manager will usually start out with $25 million to $50 million. He will use his own savings, raise capital from friends and family, as well as from his previous employer. If they are unable to raise enough capital from their previous employers or through the usual friends and family network, these managers have the choice of starting with a very small amount of capital or approaching one of the several commercial seeders.
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Question 24 of 30
24. Question
Which of the following does a commercial seeder stand to gain when they provide an aspiring hedge fund manager with startup operating capital as well as trading capital?
I. Reduction in the invested capital.
II. Assume a certain percentage ownership stake in the hedge fund.
III. Popularity in the hedge fund industry.
IV. A loss of capital in the hedge fund.Correct
A commercial seeder will provide the aspiring hedge fund manager with startup operating capital as well as trading capital. The usual seed investment provided by these commercial seeders is in the tune of $25 to $50 million. In return, the seeder will assume a certain percentage ownership stake in the hedge fund.
Incorrect
A commercial seeder will provide the aspiring hedge fund manager with startup operating capital as well as trading capital. The usual seed investment provided by these commercial seeders is in the tune of $25 to $50 million. In return, the seeder will assume a certain percentage ownership stake in the hedge fund.
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Question 25 of 30
25. Question
The most important document that a hedge fund investor needs to study and have his or her lawyer read is the offering memorandum (OM). Which of the following is included in an offering memorandum?
I. Redemption restrictions.
II. The investor’s background.
III. The fund’s strategy.
IV. The fee structure.Correct
The following is listed in the offering memorandum (OM) and they all need to be looked at very carefully by the investor and his/her lawyer:
– Redemption restrictions.
– The hedge fund manager’s background.
– The fund’s strategy.
– The fee structure.
– Risk disclosures.Incorrect
The following is listed in the offering memorandum (OM) and they all need to be looked at very carefully by the investor and his/her lawyer:
– Redemption restrictions.
– The hedge fund manager’s background.
– The fund’s strategy.
– The fee structure.
– Risk disclosures. -
Question 26 of 30
26. Question
Which of the following about the hedge fund manager’s background should be listed in the offering memorandum that a hedge fund investor and his/her lawyer need to study carefully?
I. The hedge fund manager’s education.
II. The hedge fund manager’s trading experience.
III. The hedge fund manager’s previous employers.
IV. The hedge fund manager’s immediate family.Correct
The fund manager’s background should list his education and trading experience along with details of the schools he attended, previous employers, and date. It takes specific education and experience to become a profitable hedge fund manager, hence the offering memorandum will outline whether the manager and his team possess the necessary skills.
Incorrect
The fund manager’s background should list his education and trading experience along with details of the schools he attended, previous employers, and date. It takes specific education and experience to become a profitable hedge fund manager, hence the offering memorandum will outline whether the manager and his team possess the necessary skills.
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Question 27 of 30
27. Question
There are several pitfalls that can even derail the best-laid risk management plans. Which of the following does stop losses have to take into account?
I. Market liquidity.
II. Bid-offer spreads.
III. Position sizing.
IV. Gain of anonymity.Correct
Stop loss limits and their management are the core piece of any risk management methodology. Stop losses have to take into account the following:
– Market liquidity
– Bid-offer spreads
– Gap risk
– Position sizing
– Loss of anonymityIncorrect
Stop loss limits and their management are the core piece of any risk management methodology. Stop losses have to take into account the following:
– Market liquidity
– Bid-offer spreads
– Gap risk
– Position sizing
– Loss of anonymity -
Question 28 of 30
28. Question
Stop losses have to take into account market liquidity, bid-offer spreads, gap risk, and position sizing as well as a loss of anonymity. Which of the following statements is true in normal functioning markets?
I. Gap risk is low enough that a trader can get away with large position sizes.
II. Liquidity is ample.
III. Bid-offer spreads are tight.
IV. Gap risk is high enough that a trader can get away with large position sizes.Correct
In normal functioning markets, liquidity is ample, bid-offer spreads are tight, and gap risk is low enough that a trader can get away with large position sizes.
Incorrect
In normal functioning markets, liquidity is ample, bid-offer spreads are tight, and gap risk is low enough that a trader can get away with large position sizes.
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Question 29 of 30
29. Question
There are layers of middlemen who have made fortunes trying to match investors with the appropriate hedge fund managers. Which of the following is least likely to be considered as middlemen?
Correct
The layers of middlemen who have made fortunes trying to match investors with the appropriate hedge fund managers are in the form of consultants, advisors, fund of funds, and third-party marketers. The middlemen’s main responsibility has been to understand the hedge fund strategies and make the hedge funds less opaque to the end investors.
Incorrect
The layers of middlemen who have made fortunes trying to match investors with the appropriate hedge fund managers are in the form of consultants, advisors, fund of funds, and third-party marketers. The middlemen’s main responsibility has been to understand the hedge fund strategies and make the hedge funds less opaque to the end investors.
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Question 30 of 30
30. Question
Hedge funds are not required to register with any regulatory body like the SEC. Which of the following is a result of the fact that hedge funds are not required to register with any regulatory body?
Correct
Hedge funds are operated from several countries around the world, however, hard to determine the actual number of hedge funds in existence. This is because hedge funds are not required to register with any regulatory body like the SEC.
Incorrect
Hedge funds are operated from several countries around the world, however, hard to determine the actual number of hedge funds in existence. This is because hedge funds are not required to register with any regulatory body like the SEC.