Hedge Fund Strategies & Operations Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Hedge Fund Strategies & Operations flashcards as text
A global macro hedge fund manager believes the European Central Bank will cut rates aggressively over the next six months. Which position best expresses this view?
Answer: Long Bund futures
Long Bund futures profits as German bond prices rise when the ECB cuts rates, directly expressing a rate-decline thesis.
In a merger arbitrage strategy, the spread between the target's current price and the deal price primarily compensates the investor for:
Answer: Deal break risk
The merger arbitrage spread represents compensation for deal break risk — the probability that the transaction fails to close.
A convertible bond arbitrage fund buys a convertible bond and shorts the underlying equity. The primary risk this trade is designed to exploit is:
Answer: Convertible bond mispricing relative to its theoretical value
Convertible arbitrage seeks to profit when convertible bonds trade at a discount to their theoretical fair value derived from embedded optionality and credit components.
Which operational risk is most unique to hedge funds relative to traditional long-only managers?
Answer: Prime broker counterparty risk
Hedge funds use prime brokers for leverage, securities lending, and custody, creating material counterparty exposure not typical in long-only management.
A fund employing a fixed income relative value strategy buys 10-year Treasuries and shorts 30-year Treasuries. This position profits if:
Answer: The yield curve flattens
Buying the 10-year and shorting the 30-year profits when the yield curve flattens, as the spread between long and short yields narrows.
A hedge fund's 'side pocket' mechanism is primarily used to:
Answer: Segregate illiquid or hard-to-value investments from the main portfolio
Side pockets isolate illiquid or Level 3 assets so they don't affect redemptions or NAV calculations for the liquid portion of the fund.
In the context of hedge fund prime brokerage, 'rehypothecation' refers to:
Answer: The prime broker's right to use client assets posted as collateral for its own financing purposes
Rehypothecation allows a prime broker to use a hedge fund's pledged collateral for its own financing needs, which reduces borrowing costs but creates counterparty risk for the fund.