Investments, tenth edition

  KEY TERMS  

  PROBLEM SETS 

    1.  Would a market-neutral hedge fund be a good candidate for an investor’s entire retirement port-

folio? If not, would there be a role for the hedge fund in the overall portfolio of such an investor?  

   2.  How might the incentive fee of a hedge fund affect the manager’s proclivity to take on high-risk 

assets in the portfolio?    

    3.  Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typi-

cal mutual fund manager?  

   4.    Which  of  the  following  is   most  accurate in describing the problems of survivorship bias and back-

fill bias in the performance evaluation of hedge funds?

    a.  Survivorship bias and backfill bias both result in upwardly biased hedge fund index returns.  

   b.  Survivorship bias and backfill bias both result in downwardly biased hedge fund index returns.  

   c.  Survivorship bias results in upwardly biased hedge fund index returns, but backfill bias results 

in downwardly biased hedge fund index returns.     

 

 

 

5.  

 

Which of the following would be the  

most 

 appropriate benchmark to use for hedge fund 

evaluation?

    a.  A multifactor model.  

   b.  The S&P 500.  

   c.  The  risk-free  rate.     

   6.    With respect to hedge fund investing, the net return to an investor in a fund of funds would be 

lower than that earned from an individual hedge fund because of:

    a.  Both the extra layer of fees and the higher liquidity offered.  

   b.  No reason; fund of funds earn returns that are equal to those of individual hedge funds.  

   c.  The extra layer of fees only.     

   7.    Which  of  the  following  hedge  fund  types  is   most likely  to have a return that is closest to risk-free?

    a.  A market-neutral hedge fund.  

   b.  An event-driven hedge fund.  

   c.  A  long/short  hedge  fund.        

    8.  Is statistical arbitrage true arbitrage? Explain.  

   9.  A hedge fund with $1 billion of assets charges a management fee of 2% and an incentive fee of 

20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in 

 dollars and as a percent of assets under management, for portfolio returns of:

    a.   2 5%  

   b. 0 

 

   c. 5% 

 

   d.  10%     

Basic

Intermediate

   6.  Hedge funds typically charge investors both a management fee and an incentive fee equal to a 

percentage of profits beyond some threshold value. The incentive fee is akin to a call option on 

the portfolio. Funds of hedge funds pay the incentive fee to each underlying fund that beats its 

hurdle rate, even if the overall performance of the portfolio is poor.    

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