CAIA HEDGE FUND QUESTIONS
(MODULE 7-11) EXAM QUESTIONS WITH
COMPLETE SOLUTIONS
Module 7 - Structure, Categories & Biases - Answer-90%
How are hedge fund databases populated and what is the implication of that process?
A) Hedge fund managers required to report performance, which allows us to see
complete information on hedge fund industry assets
B) Hedge fund managers required to report performance, which leads to biases in
return calculations
C) Hedge fund mangers voluntarily report performance, which leads to biases in return
calculations
D) Hedge fund mangers voluntarily report performance, which allows us to see
complete information on hedge fund industry assets - Answer-C) Hedge fund mangers
voluntarily report performance, which leads to biases in return calculations
How does the liquidity of hedge funds compare to that of mutual funds?
A) Hedge funds and mutual funds have similar liquidity
B) Hedge funds have greater liquidity than mutual funds
C) Hedge funds have less liquidity than mutual funds - Answer-C) Hedge funds have
less liquidity than mutual funds
Which of the following most accurately portrays the structure of the hedge fund
industry?
A) Thousands of small funds manage the majority of the hedge fund industry's assets
B) Few large funds with over $500mn in AUM manage the vast majority of hedge fund
assets
C) Small, medium, and large-sized funds manage similar portions of the total AUM of
the industry
D) Funds of funds manage the majority of the AUM in the hedge fund industry - Answer-
B) Few large funds with over $500mn in AUM manage the vast majority of hedge fund
assets
Which biase arises due to the ability of hedge fund managers to decide whether or not
to report their returns to a hedge fund database?
A) Backfilled bias
B) Selection bias
C) Survivorship bias
D) Smoothing bias - Answer-B) Selection bias
, Which biase arises when the historical returns of defunct hedge funds are deleted from
the database?
A) Backfilled bias
B) Selection bias
C) Survivorship bias
D) Smoothing bias - Answer-C) Survivorship bias
Which bias is due to how databases typically treat performance of hedge funds that
start to report to the database?
A) Backfilled bias
B) Selection bias
C) Survivorship bias
D) Smoothing bias - Answer-A) Backfilled bias
What is the implication of autocorrelation in hedge fund returns?
A) Returns are smoothed, which introduces a downward bias to risk, but not return
B) Returns are smoothed, which introduces a downward bias to both risk and return
C) When autocorrelation is present, past returns cannot be used to predict future
returns
D) Returns are more volatile as the correlation changes over time - Answer-A) Returns
are smoothed, which introduces a downward bias to risk, but not return
Which three of the following are typical characteristics of hedge funds?
I. Hedge funds may include substaintial leverage and short positions
II. In the U.S., investments in hedge funds are limited to high net worth and
sophisticated investors
III. Hedge funds are usually highly diversified
IV. A publicly organized investment vehicle - Answer-I, II, III
Which best characterizes hedge fund industry performance since 2009?
A) Hedge funds have underperformed equity markets due to reduced leverage and
falling interest rates
B) Hedge funds have outperformed equity markets due to leverage
C) Hedge funds have underperformed equity markets due to fraud and large losses
D) Hedge funds have outperformed equity markets due to short selling - Answer-A)
Hedge funds have underperformed equity markets due to reduced leverage and falling
interest rates
Which of the following most accurately summarizes the universe of hedge fund
strategies?
(MODULE 7-11) EXAM QUESTIONS WITH
COMPLETE SOLUTIONS
Module 7 - Structure, Categories & Biases - Answer-90%
How are hedge fund databases populated and what is the implication of that process?
A) Hedge fund managers required to report performance, which allows us to see
complete information on hedge fund industry assets
B) Hedge fund managers required to report performance, which leads to biases in
return calculations
C) Hedge fund mangers voluntarily report performance, which leads to biases in return
calculations
D) Hedge fund mangers voluntarily report performance, which allows us to see
complete information on hedge fund industry assets - Answer-C) Hedge fund mangers
voluntarily report performance, which leads to biases in return calculations
How does the liquidity of hedge funds compare to that of mutual funds?
A) Hedge funds and mutual funds have similar liquidity
B) Hedge funds have greater liquidity than mutual funds
C) Hedge funds have less liquidity than mutual funds - Answer-C) Hedge funds have
less liquidity than mutual funds
Which of the following most accurately portrays the structure of the hedge fund
industry?
A) Thousands of small funds manage the majority of the hedge fund industry's assets
B) Few large funds with over $500mn in AUM manage the vast majority of hedge fund
assets
C) Small, medium, and large-sized funds manage similar portions of the total AUM of
the industry
D) Funds of funds manage the majority of the AUM in the hedge fund industry - Answer-
B) Few large funds with over $500mn in AUM manage the vast majority of hedge fund
assets
Which biase arises due to the ability of hedge fund managers to decide whether or not
to report their returns to a hedge fund database?
A) Backfilled bias
B) Selection bias
C) Survivorship bias
D) Smoothing bias - Answer-B) Selection bias
, Which biase arises when the historical returns of defunct hedge funds are deleted from
the database?
A) Backfilled bias
B) Selection bias
C) Survivorship bias
D) Smoothing bias - Answer-C) Survivorship bias
Which bias is due to how databases typically treat performance of hedge funds that
start to report to the database?
A) Backfilled bias
B) Selection bias
C) Survivorship bias
D) Smoothing bias - Answer-A) Backfilled bias
What is the implication of autocorrelation in hedge fund returns?
A) Returns are smoothed, which introduces a downward bias to risk, but not return
B) Returns are smoothed, which introduces a downward bias to both risk and return
C) When autocorrelation is present, past returns cannot be used to predict future
returns
D) Returns are more volatile as the correlation changes over time - Answer-A) Returns
are smoothed, which introduces a downward bias to risk, but not return
Which three of the following are typical characteristics of hedge funds?
I. Hedge funds may include substaintial leverage and short positions
II. In the U.S., investments in hedge funds are limited to high net worth and
sophisticated investors
III. Hedge funds are usually highly diversified
IV. A publicly organized investment vehicle - Answer-I, II, III
Which best characterizes hedge fund industry performance since 2009?
A) Hedge funds have underperformed equity markets due to reduced leverage and
falling interest rates
B) Hedge funds have outperformed equity markets due to leverage
C) Hedge funds have underperformed equity markets due to fraud and large losses
D) Hedge funds have outperformed equity markets due to short selling - Answer-A)
Hedge funds have underperformed equity markets due to reduced leverage and falling
interest rates
Which of the following most accurately summarizes the universe of hedge fund
strategies?
