Hedge Fund - Equity Strategy

Question 1

Prime brokers have the following primary functions:

Answer 1

1) clearing and financing trades,
2) providing research,
3) arranging financing,
4) producing portfolio accounting.

Question 2

Equity market-neutral funds

Answer 2

attempt to balance short and long positions, ideally matching the beta exposure of the long and short positions and leaving the fund relatively insensitive to changes in the underlying stock market index.

Question 3

Equity long/short funds

Answer 3

tend to have net positive systematic risk exposure from taking a net long position, with the long positions being larger than the short positions.

Question 4

Breadth is

Answer 4

the number of independent active bets placed into a portfolio.

Question 5

Mean neutrality is

Answer 5

when a fund is shown to have zero beta exposure or correlation to the underlying market index.

Question 6

Sector-neutral long-only portfolios

Answer 6

have sector weightings in the portfolio that match the sector weightings in a market index. In a market neutral portfolio, sector neutrality requires the long and short positions within each sector to be of equal size or risk.

Question 7

Short-bias funds

Answer 7

have larger short positions than long positions, leaving a persistent net short position relative to the market index that allows these funds to profit during times of declining equity prices.

Question 8

Absolute return is

Answer 8

simply the return on an asset or portfolio for a given period.

Question 9

Momentum is

Answer 9

the extent to which a movement in a security price tends to be followed by subsequent movements of the same security price in the same direction.

Question 10

Equity market-neutral funds

Answer 10

attempt to balance short and long positions, ideally matching the beta exposure of the long and short positions and leaving the fund relatively insensitive to changes in the underlying stock market index.

Question 11

Security selection is

Answer 11

the process through which holdings within each asset class are determined.

Question 12

Ex ante alpha is

Answer 12

the expected superior return if positive (or inferior return if negative) offered by an investment on a forward-looking basis after adjusting for the riskless rate and for the effects of systematic risks (beta) on expected returns.

Question 13

Sector-neutral long-only portfolios

Answer 13

have sector weightings in the portfolio that match the sector weightings in a market index. In a market neutral portfolio, sector neutrality requires the long and short positions within each sector to be of equal size or risk

Question 14

Equity risk premium (ERP) is

Answer 14

the expected return of the equity market in excess of the risk- free rate.

Question 15

Short squeeze

Answer 15

occurs when holders of short positions are compelled to purchase shares at increasing prices to cover their positions due to limited liquidity and lack of ability to borrow shares

Question 16

Earnings momentum is

Answer 16

the tendency of earnings changes to be positively correlated.

Question 17

Generalists

Answer 17

invest across a wide universe of stocks.

Question 18

Serial correlation

Answer 18

(or positive autocorrelation) is the correlation of a variable, such as return, in one time period to the same variable in another time period.

Question 19

Market orders are

Answer 19

immediate execution at the best available price when market participants wish to have transactions executed without delay.

Question 20

Earnings surprise is

Answer 20

the concept and measure of the unexpectedness of an earnings announcement.

Question 21

Random walk is

Answer 21

a price series with changes in its prices that are independent from current and past prices.

Question 22

Post-earnings-announcement drift is

Answer 22

a documented anomaly in which investors can profit from positive surprises by buying immediately after the earnings announcement or selling short immediately after a negative earnings surprise.

Question 23

Short interest is

Answer 23

the percentage of outstanding shares that are currently held short.

Question 24

Share buyback program is

Answer 24

initiated when a company chooses to reduce its shares outstanding and the company purchases its own shares from investors in the open market or through a tender offer.

Question 25

Issuance of new stock is

Answer 25

a firm’s creation of new shares of common stock in that firm and may occur as a result of a stock-for-stock merger transaction or through a secondary offering.

Question 26

Net stock issuance is

Answer 26

issuance of new stock minus share repurchases.

Question 27

Liquidity is

Answer 27

the extent to which transactions can be executed with minimal disruption to prices.

Question 28

Equity HF trading assets

Answer 28

stocks and indices

Question 29

Equity HF asset size, AUM and number of HF

Answer 29

the smallest 25%, 40% of all HF

Question 30

Equity hedge fund strategies

Answer 30

differ by net market exposures:

1) equity long/short funds ( long>short position size)
2) equity market-neutral funds (less 1/10 of the 1))
3) and short-bias funds (1/100 of 1)) size of short positions is higher

Question 31

expected return formula

Answer 31

E(r)= alpha + beta(Rm-Rf)
alpha - rate at which stock outperforming the market 
beta - correlation to the market risk
Rm-market return
Rf- risk free return
Rm-Rf - risk adjusted return