Hedge Funds

Week 05 Assignment A4

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Formulate one correct response to each of Marco’s three questions.

The three types of risk a hedge fund manager must quantify are portfolio risk, counter-party risk and operational risk.

Risk based leverage is generally higher than accounting based leverage because the underlying asset is susceptible to the fluctuation of the market, and is therefore multiplied by Beta.

Identify the hedge fund investment strategy that is best characterized by each of the three strategy components reviewed by Marco.

1. Event driven.

Merger arbitrage.

Behavioral finance.

Judge whether each of Marco’s five conclusions is correct or incorrect. If incorrect, give one reason why the conclusion is incorrect.

1. Correct

This is not correct. Although some hedge funds do have limited transparency there are regulations that require funds of over 15 members or $30 Mil. total assets to regitster with the SEC. An investor can choose a fund that is made up of these funds. THe second portion of this statement is correct.

Correct. Directional funds are more associated with actual “hedging” and include long short strategies, market neutral strategy and dedicated short.

This is not correct. Macro Hedge funds are highly volatile. These funds profit from shifts in governmental policy affecting interest rates, which then affects stock prices currency exchange and bonds. The top down policy creates a high degree of both uncertainty and volatility.

5. This is true. An investor can go long with Ford and short with Chevy to neutralize market risk.