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.
Read the first 7 Hedge Fund Strategies & Operations flashcards as text
A hedge fund uses a 'portable alpha' approach by overlaying an alpha-generating strategy onto a passive beta exposure. The primary goal is to:
Answer: Generate excess returns above a benchmark while maintaining the desired beta exposure
Portable alpha separates alpha generation from beta exposure, allowing a manager to deliver benchmark returns plus excess alpha from an independent strategy.
A hedge fund's Sharpe ratio is 1.5. A new strategy has a Sharpe ratio of 0.8 but zero correlation to the existing portfolio. Adding the new strategy will most likely:
Answer: Increase the portfolio Sharpe ratio due to diversification benefits
When a new strategy has zero correlation to the existing portfolio, its addition improves overall portfolio Sharpe through diversification regardless of its individual Sharpe ratio.
In the context of hedge fund risk management, 'factor decomposition' is used to:
Answer: Identify which systematic risk factors drive portfolio returns and exposures
Factor decomposition attributes portfolio returns and volatility to systematic exposures such as market, size, value, momentum, and sector factors.
A hedge fund structured as a Delaware Limited Partnership has a 'key man clause.' This clause typically allows investors to:
Answer: Redeem capital without penalty if a specified key portfolio manager departs
A key man clause gives investors the right to redeem without lockup penalties if a designated key portfolio manager leaves the fund.
The 'information ratio' differs from the Sharpe ratio in that it measures:
Answer: Active return over a benchmark per unit of tracking error
The information ratio measures the consistency of active management by dividing alpha (return above benchmark) by tracking error (active risk).
A commodity trading adviser (CTA) using a trend-following strategy would most likely perform well during:
Answer: Prolonged trending markets in commodities, currencies, or rates
Trend-following CTAs rely on sustained directional price movements to generate returns; they struggle in mean-reverting or choppy markets.
A hedge fund's 'high-water mark' provision ensures that:
Answer: The manager collects performance fees only after recovering previous losses for each investor
The high-water mark requires the fund to recover all prior losses and exceed the previous NAV peak before performance fees can be charged again.