CFM Hedge Fund Strategies & Operations 4

Question 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:

Accepted Answer

Mean reversion in the spread relationship

Answer

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

Question 2

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

Accepted Answer

Raise capital from accredited investors without SEC registration

Answer

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.

Question 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:

Accepted Answer

The volatility risk premium — implied volatility consistently exceeding realized volatility

Answer

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

Question 4

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

Accepted Answer

Funds with AUM over $150M managing private funds

Answer

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

Question 5

A fund's 'drawdown' is defined as:

Accepted Answer

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

Answer

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

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Hedge Fund Strategies & Operations 4