Hedge Funds

Question 1

6 drawbacks to investing in a hedge fund

Answer 1

• may be illiquid
• strategy no transparent
• high minimum investments
• high charges
• fund manager strategy may not work
• less regulation / no FSCS
• high risk with potential for large or total losses
• most hedge fund gains are taxed in hands of investor

Question 2

Reasons to invest in ETFs over a hedge fund (5)

Answer 2

• better liquidity
• easier to benchmark performance
• low minimum investments
• low charges
• Passive finds son’t rwly on fund manager strategy
• regulated by FCA
• FSCS

Question 3

List four broad strategies of a hedge fund (4)

Answer 3

• long/short funds
• relative value funds
• event driven funds
• trading strategies

Question 4

Identify one hedge fund strategy with no market related element and explain how returns are achieved (3)

Answer 4

• relative value funds
• managers rely on arbitrage to produce returns
• identifying and explaining pricing anomalies between similar investments