Hedge Fund

A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions. If you are looking for a job in Hedge Fund, then try our online interview questions that can help you to lend a job.

Q.1 Please explain what makes hedge funds different?

The main distinguishing characteristics are that hedge funds using derivatives, can short sell, and have the ability to use leverage.

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Q.2 What is a convertible arbitrage?

It's an investment strategy that seeks inefficiencies of price between a convertible bond and the underlying stock. Managers will typically short the underlying stock and long the convertible bond.

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Q.3 When a manager says that he is event-driven what does it mean?

That's an investment strategy seeking to identify and exploit pricing inefficiencies that have been caused by some sort of corporate event, distressed situation, such as a merger, spin-off, or recapitalization.

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Q.4 What is the strategy of our fund?

This is specific to the firm you are interviewing with. Try to do the following:
To find any articles on the fund or its founders search the Web.
To find any articles written on the fund search online.
To see if the firm is listed search online databases.

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Q.5 Please state the key issues that you think our fund must face?

This is also specific to the firm you are interviewing with. Once you've found the strategy that the fund is pursuing, research the current environment of the fund. For example, look to find any recent announcement mergers and be prepared to discuss your opinions on it, if it is a merger arbitrage strategy. Current news events, market trends, and new financial regulations can also affect a fund's strategy.

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Q.6 What important trends do you see in this industry?

With years of my experience in this industry, I've seem more SEC regulation, continued growth in institutional investing, and the potential of offering hedge funds to average retail investors are all key issues.

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Q.7 What is Hfm?

Hedge Fund Manager (HFM) is the person who has complete control over the fund.

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Q.8 Do You Know What Makes Hedge Funds Different?

Hedge funds use derivatives, are the main distinguishing characteristics the can short sell, and have the ability to use leverage.

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Q.9 What is your take of the beta of a company?

This question is primarily asked to test your fundamental understanding of beta neutral investing. The beta of a stock measures how it moves relative to the market. Sample Answer - You can start by saying that "A stock’s beta measures how a stock moves relative to the market. For instance high-tech growers such as Workday (WDAY) typically have beta higher than 1, whereas some consumer staples such as Wal-Mart (WMT) have beta less than 1. Such that stocks having negative beta, indicates they are counter-cyclical to the economy. Beta is crucial in measuring the risks of the portfolio, and in hedging positions to build a beta neutral book.

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Q.10 What is the difference between volatility and Beta?

Even though the two sound similar, but they measure two different attributes of a stock. 1. Beta is the measure of a stock relative to the market. Beta is useful for calculating the portfolio’s market risk and for hedging individual positions. 2. Volatility on other hand measures how a stock has moved relative to itself during a time period. Think of it as the stock’s percentage change over a time distance – a day, a month, or a year. Such that dividend stocks tend to have “low volume”, while high-tech or bio-pharma growth stocks tend to be volatile, in particular around earning releases.

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Q.11 When do you use EV/EBITDA and P/E?

We often use EV/EBITDA for an accurate comparison among businesses, since it puts firms with different capital structure, tax regime, and account treatment on equal footing. On the other hand P/E is simpler when we compare a firm to the S&P average or firms in the same industry with similar capital structure.

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Q.12 Why is not advisable to refer hedge funds for small-scale retail investors?

Generally, hedge funds have a minimum investment size of around $10 million with a risk capacity to lose the entire investment if such a case arise. Here the fund manager is involved as a partner in such an investment but one needs to still have a large risk appetite. Other reason for hedge funds is not advisable for small-scale retail investors because hedge funds involve multiple and complex strategies to maximise their returns it will be difficult for investors to understand and keep track of the same.

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Q.13 What do you understand by 2/20 rule?

We can define 2/20 as a compensation structure which is employed by the hedge fund managers based on the performance of the hedge fund. This method focuses on how the hedge fund managers charge a flat 2% of the total asset value as a Management fee and additional 20% on the total profits that have been earned. Such that the Management fee is a mandatory charge that is considered essential for running of the fund and performance fees is an award to the fund manager for gaining returns more than the value of the fund.

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Q.14 Performance of a wealth manager depends on which of the following factors?

It dependso n the following factors. Market know-how Obtaining timely and accurate information

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Q.15 What is the primary focus of a wealth manager?

Client

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Q.16 What are liquid investments

Any investment that can be easily converted into cash without having a significant impact on its value.

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Q.17 What is Risk Capacity

It refers to the financial capacity of a client to withstand market loss.

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Q.18 When was Indian Wealth tax was incorporated?

1957

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Q.19 What is Call option

The right to buy an asset at a certain price.

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Q.20 What are Black box funds

Black box funds are those funds where the source of alpha is not clear.

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Q.21 What are the drawback of structured products?

The fees involved can be huge The guarantee applies only at the end of the period

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Q.22 Where did the 130/30 funds originated

It was originated in USA

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Q.23 What factor alters the return distribution of hedge funds

investment strategies

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Q.24 What do you understand about Hedge Fund?

This refers to a private, unregistered investment pool encompassing all types of investment funds, companies, and private partnerships that can use a variety of investment methods. This can be borrowing money through leverage, selling short, and derivatives for directional investing and options.

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Q.25 Define Multi-manager Platforms.

Multi-manager Platforms has a lot of Portfolio Managers running independent funds. All the involved managers are entrusted with the task of implementing various strategies and in the end, a specific fee is paid to the 'platform'. SAC and Citadel are well-known examples of multi-manager platforms. Further, working at a multi-manager hedge fund is fraught with pressure, which is not always competitive.

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Q.26 Differentiate between mutual funds and hedge funds.

Hedge funds are not subject to certain regulations that mutual funds have to follow that pertain to protecting investor interests. Some hedge fund managers are not required to register with the country’s securities exchange authority such as the Securities and Exchange Commission (US) depending on the number of assets in the hedge funds advised by a manager. Similar to mutual funds, the same prohibitions against fraud are applicable to hedge funds along with a fiduciary duty given to the manager for the funds that they manage. Secondly, Hedge fund investors are typically high net worth individuals or institutional investors like pension funds, partly because hedge funds typically require high minimum investment amounts. Mutual funds, on the other hand, are typically targeted at the general public and will accept any investor who can meet the minimum investment amount.

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Q.27 Describe the characteristics of hedge funds.

1. Investment Structure The investment structure provides great control and flexibility to the general partner of the hedge fund. 2. Capacity Constraints Hedge Funds give the fund much flexibility to tap on opportunities but they have constraints as to the extent of their marketing efforts, communication to clients, etc. 3. Transparency of Portfolio Hedge funds offer very little transparency compared to traditional assets. Many hedge fund managers are reluctant to do so partially to keep their ‘trade secrets’ within themselves for the fear of competition.

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Q.28 Name some of the Hedge Funds in India.

Some of the hedge funds in India are: HFG India Continuum Fund Avatar Investment Management India Deep Value Fund Fair Value Capital India Capital FundSM Monsoon Capital Equity Value Fund Karma Capital Management, LLC Atlantis India Opportunities Fund

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Q.29 Explain the term umbrella funds.

An umbrella fund may be used when different strategies/portfolios are to be offered or where the fund is a multi-manager fund. Instead of creating a separate fund for each strategy/portfolio manager, they are offered under one “umbrella”. An umbrella fund may be established using a single company that issues a different class of shares for each portfolio to be managed under the umbrella. Further, they are used for managed account structures as it is the most cost-efficient structure while segregation of liability between the sub-funds is (in most jurisdictions) arranged by law.

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Q.30 Name some of the third parties that have satiated the demand for hedge fund benchmarks by providing hedge fund indices.

CSFB-Tremont Hedge Fund Research (HFR) Van Hedge Zurich Capital Markets/MAR

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Q.31 Explain the Market Timing approach.

This approach involves taking positions by predicting the market trend or direction. This approach usually gives high returns. An example of a hedge fund that has used this as a practice is the Quantum Fund by George Soros (speculation on the British Pound in 1992).

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Q.32 Explain the process of Convertible arbitrage.

This states that price differences between convertible bonds and the underlying shares can arise because of inefficiencies between the convertible bond market and the share market. Secondly, the typical investment would be a long position in the convertible bond and a short position in shares in the same company. Thirdly, the profit will then be made on the fixed-income security and the short position in the underlying share. Further, by combining the two positions the investment is protected against market fluctuations. A leverage effect is often combined.

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Q.33 Explain the Equity Market Arbitrage strategy.

This investment strategy is designed for exploiting equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral, or both. However, well-designed portfolios typically control for industry, sector, market capitalization, and other exposures.

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Q.34 Define Risk Arbitrage.

Risk (or merger) arbitrage refers to the investment in both companies the acquirer and takeover party after a merger has been announced. Until the merger is done, there is usually a difference between the takeover bid price and the current price of the takeover candidate, which reflects uncertainty about whether the merger will actually take place.

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Q.35 What do you know about Global Macro?

The Global Macro strategies use macroeconomic analysis for capitalizing on asset price changes that are strongly linked to macroeconomics. For example, currencies, bonds, stock in- dices, and commodities. However, a hedge fund that used this strategy in the past is George Soros’s, Quantum Fund. This fund made US$ 1 billion in 1 day on September 1992 by speculating the British Pound would exit the European Exchange Rate Mechanism.

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Q.36 Define directional funds.

Directional funds maintain some exposure to the stock market, they are sometimes called ‘beta funds’ and are said to have a stock-like return. A fund’s returns may be unstable year to year, but they’re likely to be higher over the long run than the returns on an absolute-return fund. Further, a directional fund’s return may be disproportionately larger than its risk, but the risk is still there. These funds can also swing wildly, giving a big return some years and plummeting big in others.

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Q.37 What do you know about the absolute return fund?

An absolute-return fund is designed for generating a steady return no matter what behavior the market display at that time. An absolute-return fund has another reference name “pure-alpha fund.” Here, the fund manager attempts to remove all market risk in order to create a fund that does not vary with market performance. If the manager removes all the market risk, the fund’s performance comes entirely from the manager’s skill, which in academic terms is called ‘alpha.’

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Q.38 Define the term structured product.

The term “structured product” is the name given to an investment product that gives a return that is predetermined with reference to the performance of one or more underlying markets. These include a pre-specified term to termination, allowable leverage parameters, retraction privileges, tax features, issuer buyback obligations, foreign currency hedging (if applicable), and rebalancing (when applicable). The performance of a structured product is therefore dependent only on the performance of this underlying product and not on the discretion of the product provider.

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Q.39 Explain the process of the Multi-Strategy Fund.

This fund typically is owned and managed by one investment firm or a large institutional investment company and uses various strategies under a common organizational umbrella. Moreover, Multi-strategy funds are gaining in number because investing directly into single-strategy funds is beyond the prudent reach of most individuals, fund of funds and multi-strategy funds will remain the primary access vehicles for most non-institutional investors.

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Q.40 Name the types of fees that Hedge fund managers compensate.

1. Management fee This is usually a percentage of the size of the fund (AUM), and a performance-based incentive fee. Similar to the 20% of the profit that Alfred Winslow Jones collected on the very first hedge fund. 2. Incentive Fee Most hedge funds charge an incentive fee of anywhere between 10-20% of fund profits. The idea of the incentive fee is to reward the fund manager for good performance. Managers only collect an incentive fee when the fund is profitable, exceeding the fund’s previous high – called a high-water mark. This means that if a fund loses 5% from its previous high, the manager will not collect an incentive fee until he or she has first made up the 5% loss.

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Q.41 What do you mean by hurdle rate?

A hurdle rate refers to a minimum level of performance (typically the return of a risk-free investment, such as a short-term government bond) that must be achieved before profits are determined. This is only for a single time period. Funds with high water marks usually have significantly better performance (0.2% monthly) and are widespread (79% of funds). Hurdle rates are only used by 16% of funds and have a statistically insignificant effect on performance.

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Q.42 Explain funds of funds.

Funds of funds are an increasingly popular way for investing in hedge funds with a much lower minimum investment. Funds of hedge funds usually impose a 1-2% management fee and 10-20% performance fee, in addition to existing hedge fund fees. However, funds of funds often negotiate with hedge funds for reducing fees than individual clients and this lowers their pass-through costs.

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Q.43 Explain Markowitz’s portfolio model.

A Markowitz portfolio model is one where no added diversification can lower the portfolio’s risk for a given return expectation. Alternately, no additional expected return can be gained without increasing the risk of the portfolio. The Markowitz Efficient Frontier is the set of all portfolios of which expected returns reach the maximum given a certain level of risk.

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Q.44 Name the approaches for measuring portfolio risk.

The approaches include: Variance-based approach Value-at-risk approach.

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Q.45 Define Variance-based approach.

The variance-based approach is most powerful if returns have a linear factor structure so that the random return of each asset can be decomposed into linear responses to a small number of market-wide factors plus an asset-specific risk. However, a linear factor model is a useful model for simple stock and bond portfolios, but not for portfolios that include derivatives. Derivatives have a non-linear relationship to their underlying security, and so a portfolio including derivatives cannot be modeled with a linear factor model.

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Q.46 Explain the term CAPM.

The CAPM was developed for explaining the riskiness of securities priced in the market and this was attributed to experts like Sharpe and Lintner. Markowitz’s theory being more theoretical, CAPM aims at a more practical approach to stock valuation. Some elements of CAPM are: Capital Market Line Security Market Line Risk Return Relationship Risk-Free Rate Risk Premium on market portfolios Defensive Assets Aggressive Assets

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Q.47 Define Jensen measure.

This refers to the ratio of the portfolio’s return less the portfolio’s expected return is determined by the capital asset pricing model or CAPM. The CAPM is an economic theory that describes the relationship between risk and the pricing of assets. The CAPM theory suggests that the only risk that is priced by investors is a risk that cannot be diversified away. Further, Jensen’s measure incorporates the CAPM into its calculation. The Jensen measure is calculated as:. Rp = Rf + (RMI – Rf) x β Where, Rp = Return on portfolio RMI = Return on a market index Rf = Risk-free rate of return

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Q.48 Explain the Sharpe measure.

This can e defined as the ratio of one’s portfolio’s excess return divided by the portfolio’s standard deviation. The portfolio’s excess return is found by subtracting the risk-free rate from the amount of the portfolio’s actual return. The risk-free rate is considered by most investors as the amount of return one receives on a 6 or 12 month Treasury bill. Because these bills are default-free and since their return is nearly guaranteed, they are considered a proxy for the risk-free rate or the benchmark over which all other financial or real assets are compared. Further, the Sharpe measure is calculated as: SI = (Rt – Rf)/σf Where, SI = Sharpe’s Index Rt = Average return on the portfolio Rf = Risk-free return σf = Standard deviation of the portfolio return.

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Q.49 Define Fama-French Three-Factor Model.

This refers to a method used for explaining the risk and return of equity portfolios. The Three-Factor Model compares a portfolio to three distinct risks found in the equity market to assist in decomposing returns. Before the three-factor model, CAPM was used as a single factor way for explaining portfolio returns.

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Q.50 What do you know about the close man hedge fund?

Close Man Hedge Fund is an absolute return hedge fund. This fund applies the market-neutral investment strategy (specifically fixed-income arbitrage) by investing solely in Capital Guaranteed Bonds issued by The Royal Bank of Scotland. Thus the fund is theoretically insulated from market risks but can still benefit from price movements using a variety of techniques. For this particular fund, Close Man will engage in leveraging and using swaps to boost returns.

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Q.51 Define the term black rock.

Black Rock refers to an American multinational investment management corporation and the world’s largest asset manager. Black Rock is headquartered in New York City and can be soldiered as a leading provider of investment, advisory, and risk management solutions. This was founded in 1988 and initially offers fixed-income products.

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Q.52 Explain the term RAB Capital.

RAB Capital refers to a unique Hedge Fund in that it is one of the few UK Hedge Funds (or more specifically FOHF) that is listed on the London Stock Exchange. Their funds are accessible to the general public instead of high net worth individuals. Further, they specialize in a variety of absolute return funds, some of which employ the long-only investment strategy, where assets are bought on the basis that they are considered undervalued.

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Q.53 What do you know about GLG?

GLG is a leading global investment manager providing a comprehensive range of alternative, traditional long-only, and hybrid investment products and services to a broad range of clients. This manages assets on behalf of public sector entities, foundations, sovereign wealth funds, financial institutions and high net worth individuals. In 2010 GLG was acquired by Man.

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