Question #39

Reading: Reading 34 Hedge Fund Strategies

PDF File: Reading 34 Hedge Fund Strategies.pdf

Page: 16

Status: Incorrect

Correct Answer: A

Your Answer: B

Part of Context Group: Q38-39
Shared Context
- Considering all the short-term objectives specified in the recent investment committee motion, which of the following style allocation recommendations for CAM is most likely to be appropriate? A) Rotate from relative value strategies into equity strategies. B) Rotate from equity strategies into opportunistic strategies. C) Rotate from equity strategies into distressed securities funds.
Question
How many of the three factors listed by the client of CAM would a fund-of-funds (FoF) structure be preferred to a multi-manager structure from the point of view of investors in the fund?
Answer Choices:
A. Two
B. None
C. One
Explanation
Only the operational risk factor is favorable for the FoF structure versus a multi-manager fund structure. Fewer FoFs fail due to operational risk factors due to the diversification of the structure over multiple underlying funds with different operational risk exposures, and the lower level of leverage in FoFs versus multi-manager funds. Hence, from an operational risk perspective, FoFs are preferable to multi-manager funds. Multi-manager funds are able to reallocate funds to different styles tactically faster than FoFs because multi-manager funds are not subject to the notice periods or lockups of external underlying funds. Hence, from a speed of tactical asset allocation perspective, the multi-manager structure is preferred. Incentive fees are more likely to be able to be netted off across the performance of different teams in a single multi-manager structure rather than in an FoF, where external managers will take incentive fees on positive performance regardless of whether the overall FoF is profitable.
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