AIMs: Evaluate the role of investors in shaping the hedge fund industry. Explain the relationship between risk and alpha in hedge funds. Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy.
Questions:
411.1. According to Fung and Hsieh "the majority of managed futures funds pursue trend following strategies." Therefore, they classify managed future hedge funds as a directional style (as opposed to non-directional or relative or arbitrage-like). Which exotic or option trading strategy most nearly resembles the payoff of a trend-following strategy?
a. Asian average price call with an arithmetic price average
b. Exchange option where the underlying asset is the risk-free asset
c. A chooser option where the call and put share the same strike price
d. Floating lookback straddle; i.e., floating lookback call plus floating lookback put
411.2. Fung and Hsieh describe one hedge fund strategy in the following way: "[These] fund managers are known to be highly dynamic traders, often taking highly leveraged bets on directional movements in exchange rates, interest rates, commodities, and stock indices in an opportunistic manner. We can think of [them] as a highly active asset allocator betting on a range of risk factors over time. Over a reasonably long time frame, opportunities in different risk factors will come and go." To which strategy does this description refer?
a. Merger arbitrage; aka, risk arb
b. Global Macro
c. Event-driven distressed
d. Convertible arbitrage
411.3. Fung and Hsieh include two major strategies in the event-driven category: risk (marger) arbitrage and distressed. About these event-driven strategies, each of the following is true EXCEPT which is false?
a. Risk arbitrage strategy returns (risk arbitrage index) are correlated to the S&P 500
b. Distressed strategy returns (Distress index) are correlated with high yield bonds
c. Both of these event-driven strategies--risk arb and distressed--exhibit nonlinear returns characteristics
d. Both of these event-driven strategies--risk arb and distressed--tend to benefit from extreme market moves in either direction
Answers here:
Questions:
411.1. According to Fung and Hsieh "the majority of managed futures funds pursue trend following strategies." Therefore, they classify managed future hedge funds as a directional style (as opposed to non-directional or relative or arbitrage-like). Which exotic or option trading strategy most nearly resembles the payoff of a trend-following strategy?
a. Asian average price call with an arithmetic price average
b. Exchange option where the underlying asset is the risk-free asset
c. A chooser option where the call and put share the same strike price
d. Floating lookback straddle; i.e., floating lookback call plus floating lookback put
411.2. Fung and Hsieh describe one hedge fund strategy in the following way: "[These] fund managers are known to be highly dynamic traders, often taking highly leveraged bets on directional movements in exchange rates, interest rates, commodities, and stock indices in an opportunistic manner. We can think of [them] as a highly active asset allocator betting on a range of risk factors over time. Over a reasonably long time frame, opportunities in different risk factors will come and go." To which strategy does this description refer?
a. Merger arbitrage; aka, risk arb
b. Global Macro
c. Event-driven distressed
d. Convertible arbitrage
411.3. Fung and Hsieh include two major strategies in the event-driven category: risk (marger) arbitrage and distressed. About these event-driven strategies, each of the following is true EXCEPT which is false?
a. Risk arbitrage strategy returns (risk arbitrage index) are correlated to the S&P 500
b. Distressed strategy returns (Distress index) are correlated with high yield bonds
c. Both of these event-driven strategies--risk arb and distressed--exhibit nonlinear returns characteristics
d. Both of these event-driven strategies--risk arb and distressed--tend to benefit from extreme market moves in either direction
Answers here:
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