CAIA - 32 - Funds of Hedge Funds and Multi-Strategy Funds Flashcards Preview

CAIA > CAIA - 32 - Funds of Hedge Funds and Multi-Strategy Funds > Flashcards

Flashcards in CAIA - 32 - Funds of Hedge Funds and Multi-Strategy Funds Deck (61)
Loading flashcards...
1

What are the 3 approaches to investing in hedge funds?

1. Direct

2. Delegated

3. Indexed

2

What is the main disadvantage to investing directly with hedge funds?

It requires minimum capital levels and financial sophistication.

3

What are the 3 advantages to investing directly in hedge funds?

1. Cost savings

2. Access to cost effective, experienced consultants

3. Greater control and transparency

4

What is the delegated approach to investing in hedge funds?

Investing in a fund of funds

5

What are the 5 services provided by the delegated, or fund of funds approach?

1. S

2. D

3. S

4. P

5. R

What are the 5 services provided by the delegated, or fund of funds approach?

1. Sourcing

2. Due diligence

3. Strategy and selection

4. Portfolio Construction

5. Risk management and monitoring

6

Why is sourcing an advantage to fund of funds?

They can provide access to higher quality hedge funds

7

Does academic research suggest that Fund of Fund's additional layer of fees justify the operational due diligence they perform?

Yes - Large FoFs outperform small FoFs by a significant margin, indicating fees are justified.

8

Has the value proposition of FoFs increased, decreased or stayed the same? Why?

Decreased as investors have become more sophisticated.

9

What idiosyncratic risk can be reduced through the FoF structure in case of an underlying hedge fund failure?

Headline risk

10

How are hedge fund index products typically sold?

Certificates or principal guaranteed notes

11

What products have recently become available that provide hedge fund exposure without the drawbacks?

Liquid Alternative Funds

12

What are the 3 advantages to liquid alternative funds?

1. Daily liquidity

2. Lower fees

3. Improved transparency

13

What has historically been the hedge fund of fund fee structure and how has that changed?

1% and 10% but those fees have been declining due to poor performance

14

what is a typical fund of fund fee for large allocations now?

50-100 bps with no incentive fee

15

What are the typical lock up and liquidity provisions of a fund of fund?

1 year lock up, quarterly redemptions with between 90 and 180 days notice and monthly subscriptions

16

Hedge fund flows have been skewed toward what type of managers lately?

Larger managers

17

What did Xiong et. al (2009) conclude?

FoF performance, fund flows, and asset size are positively correlated.

18

What are the 4 different methods of FoF diversification?

1. Diversified

2. Concentrated

3. Single-strategy

4. Tactical

19

How many funds are typically in a diversified hedge fund of fund?

30-50

20

How many funds are typically in a concentrated FoF strategy?

5-10

21

What is a single strategy fund of funds?

A FoF that allocates across several funds that follow the same strategy

22

How many funds are typically in a tactical FoF?

5-15

23

Are fund of fund databases exposed to the same biases as individual hedge fund databases?

They are exposed to very little if any

24

What are the 3 biases present in individual hedge fund databases that have very little, if any presence in FoFs databases?

1. Survivorship bias

2. Selection bias

3. History (backfill) bias

25

What has the general performance history of FoFs been?

Good performance in the 90s followed by declining performance in the 2000s in both absolute and risk-adjusted performance. 2008 was the worst year.

26

What is the standard approach to constructing a FoF

AUM-weighted

27

What are the different ways to construct a fund of funds portfolio?

1. A

2. E

3. E

4. M

5. M

What are the different ways to construct a fund of funds portfolio?

1. AUM-weighted

2. Equal-weighted

3. Equal-risk weighted

4. Mean-variance optimization (MVO)

5. MVO with higher moment constraints

28

What is the most objective and simple to implement approach to portfolio construction?

Equal-weighted

29

What are the unrealistic assumptions that can make implementing an equal-weighted approach difficult?

No transaction costs or liquidity contraints

30

What portfolio construction approach has the highest volatility?

Equal weighted

Decks in CAIA Class (39):