Hedge Funds

Question 1

What is headline risk?

Answer 1

events that are unexpected or controversial such that they cause major news stories

Question 2

What is the average life of a hedge fund?

Answer 2

According to empirical studies, hedge funds have an average life of 2.5-3 years.

Question 3

Why do EVENT DRIVEN and RELATIVE VALUE share the same kind of risk?

Answer 3

Both strategies bet that some event will take place some time in the future and so are exposed to unexpected changes in conditions associated with that event.

Question 4

The incentive fee option implies that the hedge fund manager holds a ______ position in a European _____ option.

Therefore, it implies that the hedge fund investor holds a ______ position in the ______ option.

Answer 4

LONG, CALL
SHORT, CALL

Question 5

Incentive Fee Call Option Value

Answer 5

Fee (20%) x 40% x NAV x Volatility

Question 6

Instant History or Backfill Bias

Answer 6

Inconsistent reporting practices can unduly inflate the apparent performance of a hedge fund

Question 7

Instant history bias inflates reported performance by an average of _____ per year, and is more of a problem for _____ than _____

Answer 7

1-5%
databases
published indices

Question 8

Survivorship bias is observed when failed funds are removed from a data set.

The returns of the hedge funds that are in the database are ____ than those of the failed, poor-performing funds.

As a result, historical hedge fund returns are overestimated. This overestimation has been found to be about _____ per year.

Answer 8

Higher
2.6 to 5%

Question 9

The size of the hedge fund industry (in AUM) at the end of 2018 was more than ____

Answer 9

USD 3.2trn

Question 10

What is Hazard Rate

Answer 10

The hazard rate is the fraction of hedge funds that drop out of a database at a given age. In effect, it represents a failure rate.

Question 11

How was short-bias hedge funds performed over the past decade?

Answer 11

Short-bias funds had zero average return and positive alpha (i.e., their average return exceeded the market portfolio return when adjusted for their negative beta risk). The positive alpha reflects their superior stock-picking skill, given their negative beta during a period of rising stock prices.

Note: The funds’ negative beta is due to their negative correlation with the equity market.

Question 12

Survivorship bias overestimates performance by ____

Answer 12

3 to 5%