CAIA - 31 - Hedge Fund Replication Flashcards Preview

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Flashcards in CAIA - 31 - Hedge Fund Replication Deck (62)
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1

___ ___refer to exposure to risk, risk premiums, and sources of return not typically available with traditional assets.

Alternative betas refer to exposure to risk, risk premiums, and sources of return not typically available with traditional assets.

2

These are designed to capture traditional and alternative betas of hedge fund benchmarks.

Hedge fund replication products

3

Hedge fund replication products are also referred to as:

clones or trackers

4

There are 3 broad approaches to hedge fund replication:

1. Factor based

2. Payoff distribution

3. Bottom-up or algorithmic

5

Factor-based approaches to hedge fund replication are what type of technique?

statistical

6

Payoff distribution approaches to hedge fund replication are what type of technique?

statistical

7

What is the aim of bottom up or algorithmic approaches to hedge fund replication?

Capture the trading approach used by most managers of a given strategy

8

Hedge fund replication strategies can benefit a portfolio in 2 broad ways:

1. enhance returns

2. diversify risk

9

What types of hedge funds are return enhancers?

1. long-short

2. some global macro

10

What are the 3 most common examples of hedge funds that are risk diversifiers

1. CTAs

2. Some Global Macro

3. Most relative value funds

11

What has happened to hedge fund alpha over the past decade?

It's been positive, but has declined

12

What are the 3 explanations for the decline in alpha?

1. Fund bubble hypothesis

2. Capacity constraint hypothesis

3. Increased allocations to active funds hypothesis

13

What is the fund bubble hypothesis?

Mediocre traditional managers entered the hedge fund space to earn more

14

What is the capacity constraint hypothesis?

Alpha is a zero sum game and as capital has increased, alpha has decreased.

15

What is the increased allocation to active funds hypothesis?

As hedge funds become more widespread, investors that have traditional and hedge fund exposure cause higher correlations because of liquidity needs.

16

Can a replicating product created with liquid securities provide exposure to illiquidity risk?

No

17

Can convertible bond arbitrage and volatility trading strategies be replicated using ETFs?

Yes

18

Can the dynamic, or time-varying beta of hedge funds be replicated?

Yes

19

Should replication products be used if the goal is to access unique sources of risk (e.g. illiquidity) or top-tier managers?

No

20

What should be the goal of utilizing replication products?

Capture the alpha and beta of the replication products' underlying benchmark.

21

Per academic studies, can top-tier managers be identified priori?

Evidence is mixed. Studies that show return persistence still show a decline over time.

22

What are the 8 unique benefits of hedge fund replication products?

 

1. L

2. T

3. F

4. L

5. H

6. L

7. D

8. B

What are the 8 unique benefits of hedge fund replication products?

1. Liquidity

2. Transparency

3. Flexibility

4. Lower fees

5. Hedging opportunities

6. Lower due diligence and monitoring risks

7. Diversification

8. Benchmarking

23

What is the factor based approach to hedge fund replication?

Based on the fact that a fund's returns can be explained by asset-based factors. Approach involves constructing long and/or short portfolio to replicate factor risks of a manager or several managers

24

What is the typical manager structure of a factor-based benchmark?

Sometimes 1 manager, but typically an equal weighting of several managers

25

What are the 4 components of constructing a factor-based replication product?

1. Choice of benchmark

2. Choice of factors

3. Length of estimation period

4. Number of factors

26

What are the advantages/disadvantages of using a large number of factors?

Generally results in good in-sample fit, but may result in poor out-of-sample performance

27

Beyond the main 4, what are 4 other examples of decisions to be made for constructing a factor based replication product?

1. Adjusting for stale prices

2. Adjusting for fees

3. Selecting correct econometric teqchnique

4. Whether to use overlays

28

What are the 3 steps for setting up a factor-based replication program?

1. Estimate weights of risky assets

2. Estimate weight of cash

3. Invest in different areas

29

What is the equation to measure a model's in-sample fit?

30

What are the 2 key concepts that address how hedge fund returns can be replicated using only a small number of factors and how mimicking weights can be accurately esimated?

1. View commonality

2. Exposure inertia

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