Practice Test Geeks(CFM) Certified Fund Manager Practice Test
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Hedge Fund Strategies & Operations Flashcards

7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A statistical arbitrage fund identifies that the historical correlation between two tech stocks has broken down. The fund shorts the outperforming stock and buys the underperformer. This approach relies on the assumption of:

    Answer: Mean reversion in the spread relationship

    Statistical arbitrage pairs trading is predicated on mean reversion — the belief that divergences in historically correlated securities will converge back toward their historical relationship.

  2. Regulation D (Reg D) in the US primarily allows hedge funds to:

    Answer: Raise capital from accredited investors without SEC registration

    Reg D provides an exemption allowing hedge funds to raise capital from accredited investors via private placement without registering the securities offering with the SEC.

  3. A volatility arbitrage fund sells realized volatility through delta-hedged short options and buys implied volatility through variance swaps. The primary source of profit is:

    Answer: The volatility risk premium — implied volatility consistently exceeding realized volatility

    Volatility arbitrage strategies exploit the persistent volatility risk premium, where implied volatility tends to be priced above subsequent realized volatility on average.

  4. Under the Dodd-Frank Act, which hedge funds are required to register with the SEC as investment advisers?

    Answer: Funds with AUM over $150M managing private funds

    Dodd-Frank eliminated the private adviser exemption, requiring advisers to private funds with over $150M in AUM to register with the SEC.

  5. A fund's 'drawdown' is defined as:

    Answer: The peak-to-trough decline in fund NAV before a new high is reached

    Maximum drawdown measures the largest peak-to-trough loss in NAV before recovery, serving as a key risk metric for hedge funds.

  6. Which of the following is a key operational control in hedge fund administration to prevent NAV manipulation?

    Answer: Independent fund administrator calculating NAV separately from the manager

    Having an independent third-party administrator calculate NAV provides a critical check against the manager inflating asset values or manipulating reported returns.

  7. A convertible bond is trading at a conversion premium of 30%. If the underlying stock rises 20%, the convertible bond will most likely:

    Answer: Rise by less than 20% due to the high premium reducing delta

    A high conversion premium implies a low delta, so the convertible bond participates in less than 100% of the stock's upside, rising by less than 20%.