IFIC Ch 13 p.2 questions with verified
solutions
_______ are generally not required by securities laws to provide the comprehensive initial and ongoing
information associated with securities offered through a ________. This lack of transparency may create
a situation in which _______ investors may not always know how their money is being invested.
hedge funds, prospectus
______do not seek to produce returns "relative" to a particular index, but strive to generate positive
returns regardless of market direction. This risk, also referred to as ________, is the risk associated with
the direction of interest rates, equities, currencies and commodities.
Hedge funds, first order risk,
Unlike mutual funds, _______ are typically not able to ______ their portfolios on short notice. Holding
less liquid investments often produces some of the excess returns generated by hedge funds. This
liquidity premium is part of the trade-off against traditional investments. In light of this, there are often
various forms of liquidity constraints imposed on hedge fund investors. This risk is also referred to as
_______ and is related to aspects of trading, such as dealing, implementing arbitrage structures, or
pricing illiquid or infrequently valued securities.
hedge funds, liquidate, second order risk,
Consider only those single-strategy hedge funds that have at least a two-year track record and $25
million under management.
Fund track record
Investor's risk profile should be consistent with the risk characteristics of the hedge fund. Identify
different measures of the fund's risk and risk-adjusted return and compare them with the same
measures for the fund's peers.
, Risk characteristics
Examine the experience and reputation of the hedge fund firm and manager. The fund manager should
have many years of experience with the trading system under use. Focus on the individuals making the
investment decisions rather than on the sales representatives trying to sell the fund.
hedge fund manager
Read the marketing material, the prospectus, offering memorandum, or information statement. Do not
rely solely on sales presentations for information. Understand the fund's fee and expense structure, the
potential use of leverage, and the liquidity terms
hedge fund features
Understand the nature of return statistics published in marketing materials. The results should
encompass enough market cycles to prove the trading system to be reliable over time.
Return statistics
Understand the tax implications of the fund. Some hedge funds are taxed annually while others are
taxed only upon disposition. Some funds regularly distribute income while others distribute a
combination of capital gains and income.
tax treatment
Know whether the fund is exposed to currency risk, whether the manager intends to hedge that risk, and
whether the manager has expertise in hedging currency risk.
Currency risk
solutions
_______ are generally not required by securities laws to provide the comprehensive initial and ongoing
information associated with securities offered through a ________. This lack of transparency may create
a situation in which _______ investors may not always know how their money is being invested.
hedge funds, prospectus
______do not seek to produce returns "relative" to a particular index, but strive to generate positive
returns regardless of market direction. This risk, also referred to as ________, is the risk associated with
the direction of interest rates, equities, currencies and commodities.
Hedge funds, first order risk,
Unlike mutual funds, _______ are typically not able to ______ their portfolios on short notice. Holding
less liquid investments often produces some of the excess returns generated by hedge funds. This
liquidity premium is part of the trade-off against traditional investments. In light of this, there are often
various forms of liquidity constraints imposed on hedge fund investors. This risk is also referred to as
_______ and is related to aspects of trading, such as dealing, implementing arbitrage structures, or
pricing illiquid or infrequently valued securities.
hedge funds, liquidate, second order risk,
Consider only those single-strategy hedge funds that have at least a two-year track record and $25
million under management.
Fund track record
Investor's risk profile should be consistent with the risk characteristics of the hedge fund. Identify
different measures of the fund's risk and risk-adjusted return and compare them with the same
measures for the fund's peers.
, Risk characteristics
Examine the experience and reputation of the hedge fund firm and manager. The fund manager should
have many years of experience with the trading system under use. Focus on the individuals making the
investment decisions rather than on the sales representatives trying to sell the fund.
hedge fund manager
Read the marketing material, the prospectus, offering memorandum, or information statement. Do not
rely solely on sales presentations for information. Understand the fund's fee and expense structure, the
potential use of leverage, and the liquidity terms
hedge fund features
Understand the nature of return statistics published in marketing materials. The results should
encompass enough market cycles to prove the trading system to be reliable over time.
Return statistics
Understand the tax implications of the fund. Some hedge funds are taxed annually while others are
taxed only upon disposition. Some funds regularly distribute income while others distribute a
combination of capital gains and income.
tax treatment
Know whether the fund is exposed to currency risk, whether the manager intends to hedge that risk, and
whether the manager has expertise in hedging currency risk.
Currency risk
