CIMA Investment Vehicles and Strategies 2 — Questions and Answers
Question 1: A hedge fund employs a long/short equity strategy. If the fund is net long 60% and net short 40%, what is the fund's net market exposure?
- 20% (Correct answer)
- 60%
- 100%
- 40%
Correct answer: 20%
Net market exposure equals net long minus net short positions: 60% - 40% = 20%.
Question 2: Which feature distinguishes a closed-end fund from an open-end mutual fund?
- Closed-end funds issue a fixed number of shares traded on exchanges (Correct answer)
- Closed-end funds redeem shares at NAV on demand
- Closed-end funds cannot use leverage
- Closed-end funds must distribute all income annually
Correct answer: Closed-end funds issue a fixed number of shares traded on exchanges
Closed-end funds have a fixed share count and trade on exchanges, often at premiums or discounts to NAV.
Question 3: A commodity-linked structured note provides principal protection and upside participation in crude oil prices. This product combines:
- A zero-coupon bond and a long call option on oil (Correct answer)
- A floating-rate note and a futures contract on oil
- A Treasury bill and a short put option on oil
- An equity swap and an interest rate cap
Correct answer: A zero-coupon bond and a long call option on oil
Principal-protected notes typically embed a zero-coupon bond (to guarantee return of principal) and a call option (to provide upside participation).
Question 4: An investor in a Master Limited Partnership (MLP) receives distributions. For tax purposes, most MLP distributions are treated as:
- Return of capital, reducing the investor's cost basis (Correct answer)
- Ordinary income subject to full tax rates
- Qualified dividends taxed at preferential rates
- Tax-exempt income under pass-through provisions
Correct answer: Return of capital, reducing the investor's cost basis
Most MLP distributions are considered return of capital, deferring taxes and reducing the investor's adjusted cost basis.
Question 5: Which strategy best describes a risk arbitrage approach in a merger situation?
- Buy target shares and short acquirer shares to capture the deal spread (Correct answer)
- Buy both target and acquirer shares to benefit from deal synergies
- Short both companies to profit if the deal fails
- Buy acquirer bonds and short target equity
Correct answer: Buy target shares and short acquirer shares to capture the deal spread
Risk (merger) arbitrage involves buying the acquisition target and shorting the acquirer to capture the spread between current price and deal price.
Question 6: In a currency overlay program, the overlay manager's primary objective is to:
- Manage foreign exchange risk separately from the underlying portfolio (Correct answer)
- Eliminate all currency exposure in international investments
- Maximize returns through active currency speculation
- Hedge only equity currency risk while leaving bond exposure open
Correct answer: Manage foreign exchange risk separately from the underlying portfolio
A currency overlay program separates the management of FX risk from the underlying asset management, allowing specialized hedging or active currency positioning.
Question 7: A collateralized loan obligation (CLO) is primarily backed by:
- A diversified pool of leveraged corporate loans (Correct answer)
- Residential mortgage loans originated by banks
- Investment-grade corporate bonds
- Government agency securities
Correct answer: A diversified pool of leveraged corporate loans
CLOs are structured vehicles backed primarily by pools of leveraged (below-investment-grade) corporate loans.
CIMA Investment Vehicles and Strategies 2
A hedge fund employs a long/short equity strategy.
If the fund is net long 60% and net short 40%, what is the fund's net market exposure?