CFM Hedge Fund Strategies & Operations 3 — Questions and Answers
Question 1: A long/short equity fund has a gross exposure of 200% and a net exposure of 20%. If the portfolio is $100M in AUM, what is the approximate dollar value of the short book?
- $80M
- $90M (Correct answer)
- $100M
- $110M
Correct answer: $90M
With gross = long + short = 200% = $200M and net = long - short = 20% = $20M, solving gives long = $110M and short = $90M.
Question 2: Which hedge fund strategy tends to exhibit the lowest correlation to broad equity markets during normal market conditions?
- Long/short equity
- Global macro (Correct answer)
- Dedicated short bias
- Emerging market long/short
Correct answer: Global macro
Global macro funds trade across asset classes including currencies, rates, and commodities based on macroeconomic themes, typically resulting in lower equity market correlation.
Question 3: A fund of hedge funds charges a 1% management fee and 10% performance fee on top of the underlying funds' '2 and 20' structure. This layering is commonly called:
- Double alpha
- Fee drag
- Double fee structure (Correct answer)
- Layered alpha extraction
Correct answer: Double fee structure
The double fee structure (or double layer of fees) refers to investors paying fees at both the fund-of-funds level and the underlying fund level, significantly eroding net returns.
Question 4: Under the AIFMD in Europe, what is the leverage limit typically imposed on alternative investment funds using the commitment method?
- 100% of NAV
- 200% of NAV
- 300% of NAV
- No hard limit; regulators set fund-specific limits (Correct answer)
Correct answer: No hard limit; regulators set fund-specific limits
AIFMD does not impose a fixed leverage cap; instead, national regulators can impose fund-specific leverage limits based on risk assessments.
Question 5: A distressed debt hedge fund purchases senior secured bonds of a bankrupt company at 40 cents on the dollar. The fund's primary risk is:
- Spread duration risk
- Recovery rate uncertainty and reorganization timeline (Correct answer)
- Prepayment risk
- Index rebalancing risk
Correct answer: Recovery rate uncertainty and reorganization timeline
Distressed investing risk centers on what recovery rate creditors will receive through reorganization and how long the bankruptcy process will take, affecting IRR.
Question 6: A hedge fund's 'hurdle rate' in its fee structure means the fund:
- Must return investor capital before charging any fees
- Only charges performance fees on returns above a specified minimum return (Correct answer)
- Cannot charge management fees in loss years
- Must beat a specific benchmark to remain open
Correct answer: Only charges performance fees on returns above a specified minimum return
A hurdle rate is a minimum return threshold that must be exceeded before the manager can collect performance fees on any gains.
Question 7: Which of the following best describes a 'quantitative long/short equity' hedge fund strategy?
- Uses fundamental analysis to identify undervalued stocks and shorts overvalued ones
- Uses statistical models and factor signals to systematically rank and trade large stock universes (Correct answer)
- Employs technical chart patterns to time entry and exit of long and short positions
- Focuses exclusively on earnings surprises to generate alpha
Correct answer: Uses statistical models and factor signals to systematically rank and trade large stock universes
Quantitative long/short equity funds use systematic factor models — such as value, momentum, and quality — to rank and trade broad universes of equities with minimal discretionary input.
CFM Hedge Fund Strategies & Operations 3
A long/short equity fund has a gross exposure of 200% and a net exposure of 20%.
If the portfolio is $100M in AUM, what is the approximate dollar value of the short book?