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    which of the following is a primary disadvantage to investing in a hedge fund?

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    View FIN Quiz Questions.docx from FIN 301 at Pennsylvania State University. Which of the following is a primary disadvantage to investing in a hedge fund? Hedge funds invest in only stocks Hedge

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    Which of the following is a primary disadvantage to investing in a hedgefund?Hedge funds invest in only stocksHedge funds use advanced investment strategiesIlliquidityHedge funds invest in only bondsLax regulation

    Which of the following is true concerning the difference between simple andcompound interest?

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    If you are buying a stock, which of the following ask prices is the mostattractive?

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    Mr. Wonderful needs $3,000,000 upon retirement in 10 years to livecomfortably. He can invest $140,000 a year to his retirement. What interestrate would his investment need to earn in order for him to meet his goals?

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    Suppose your investment returns are taxed at a 20% rate. If you invest$100,000 today and expect to earn a rate of return of 8%, what will yourinvestment be worth in 25 years?$684,847$108,000$106,400$471,564$148,711

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    What Are Hedge Funds?

    A hedge fund is an investment partnership—the marriage of a fund manager and investors who pool their money together into the fund.

    The use of hedge funds in financial portfolios has grown dramatically since the start of the 21st century. A hedge fund is just a fancy name for an investment partnership that has freer rein to invest aggressively and in a wider variety of financial products than most mutual funds. It's the marriage of a professional fund manager, who is often known as the general partner, and the investors, sometimes known as the limited partners. Together, they pool their money into the fund. This article outlines the basics of this alternative investment vehicle.

    KEY TAKEAWAYS

    Hedge funds are financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors.

    These funds may be managed aggressively or make use of derivatives and leverage to generate higher returns.

    Hedge fund strategies include long-short equity, market neutral, volatility arbitrage, and merger arbitrage.

    They are generally only accessible to accredited investors.

    The First Hedge Fund

    A former writer and sociologist Alfred Winslow Jones’s company, A.W. Jones & Co., launched the world's first hedge fund back in 1949.1 Jones was inspired to try his hand at managing money while writing an article about investment trends earlier that year. He raised $100,000 (including $40,000 out of his own pocket) and tried to minimize the risk in holding long-term stock positions by short selling other stocks.2

    This investing innovation is now referred to as the classic long/short equities model. Jones also employed leverage to enhance returns. In 1952, he altered the structure of his investment vehicle, converting it from a general partnership to a limited partnership and adding a 20% incentive fee as compensation for the managing partner.2

    As the first money manager to combine short selling, the use of leverage and shared risk through a partnership with other investors, and a compensation system based on investment performance, Jones earned his place in investing history as the father of the hedge fund.2

    Hedge Fund Partnerships

    A hedge fund's purpose is to maximize investor returns and eliminate risk. If this structure and these objectives sound a lot like those of mutual funds, they are, but that's where the similarities end. Hedge funds are generally considered to be more aggressive, risky, and exclusive than mutual funds. In a hedge fund, limited partners contribute funding for the assets while the general partner manages the fund according to its strategy.

    The name hedge fund derives from the use of trading techniques that fund managers are permitted to perform. In keeping with the aim of these vehicles to make money, regardless of whether the stock market climbs higher or declines, managers can hedge themselves by going long (if they foresee a market rise) or shorting stocks (if they anticipate a drop). Even though hedging strategies are employed to reduce risk, most consider these practices to carry increased risks.

    Hedge funds took off in the 1990s when high-profile money managers deserted the mutual fund industry for fame and fortune as hedge fund managers. Since then, the industry has grown substantially with total assets under management (AUM) valued at more than $3.25 trillion, according to the 2019 Preqin Global Hedge Fund Report.3

    The number of operating hedge funds has grown as well. There are 3,635 hedge funds in the U.S. in 2021, an increase of 2.5% from 2020.4

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    How To Legally Form A Hedge Fund

    Aim and Characteristics of Hedge Funds

    A common theme among most mutual funds is their market direction neutrality. Because they expect to make money whether the market trends up or down, hedge fund management teams more closely resemble traders than classic investors. Some mutual funds employ these techniques more than others, and not all mutual funds engage in actual hedging.

    There are several key characteristics that set hedge funds apart from other pooled investments—notably, their limited availability to investors.

    Accredited or Qualified Investors

    Hedge funds investors have to meet certain net worth requirements—generally, a net worth exceeding $1 million or an annual income over $200,000 for the previous two years.5

    Hedge fund investors require a net worth that exceeds $1 million.5

    Wider Investment Latitude

    A hedge fund's investment universe is only limited by its mandate. A hedge fund can invest in anything—land, real estate, derivatives, currencies, and other alternative assets. Mutual funds, by contrast, usually have to stick to stocks or bonds.

    Often Employ Leverage

    Hedge funds often use leverage or borrowed money to amplify their returns, which potentially exposes them to a much wider range of investment risks—as demonstrated during the Great Recession. In the subprime meltdown, hedge funds were especially hard-hit due to increased exposure to collateralized debt obligations and high levels of leverage.6

    Fee Structure

    Hedge funds charge both an expense ratio and a performance fee. The common fee structure is known as two and twenty (2 and 20)—a 2% asset management fee and a 20% cut of generated gains.

    There are more specific characteristics that define a hedge fund, but because they are private investment vehicles that only allow wealthy individuals to invest, hedge funds can pretty much do what they want—as long as they disclose the strategy upfront to investors.

    Source : www.investopedia.com

    Finance Quiz 3 Flashcards & Practice Test

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    Finance Quiz 3

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    Which of the following is TRUE in regards to hedge funds?

    A. Hedge funds are very liquid.

    B. Hedge funds are good investments for the average investor.

    C. Hedge fund fees are much lower than mutual fund fees.

    D. Hedge funds are taxed as ordinary income.

    E. Hedge funds are largely unregulated.

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    E

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    Which of the following is TRUE in regards to hedge funds?

    A. Hedge funds generally have a "2-20" fee structure.

    B. Hedge funds are good investments for the average investor.

    C. Hedge fund fees are much lower than mutual fund fees.

    D. Hedge funds are taxed as ordinary income.

    E. Hedge funds are highly regulated.

    Click card to see definition 👆

    A

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    Terms in this set (61)

    Which of the following is TRUE in regards to hedge funds?

    A. Hedge funds are very liquid.

    B. Hedge funds are good investments for the average investor.

    C. Hedge fund fees are much lower than mutual fund fees.

    D. Hedge funds are taxed as ordinary income.

    E. Hedge funds are largely unregulated.

    E

    Which of the following is TRUE in regards to hedge funds?

    A. Hedge funds generally have a "2-20" fee structure.

    B. Hedge funds are good investments for the average investor.

    C. Hedge fund fees are much lower than mutual fund fees.

    D. Hedge funds are taxed as ordinary income.

    E. Hedge funds are highly regulated.

    A

    Which of the following is a primary disadvantage to investing in a hedge fund?

    A. Hedge funds invest in only stocks

    B. High water marks C. Illiquidity D. Low returns E. Lax regulation C

    Which of the following is an advantage to investing in a hedge fund?

    A. Hedge funds invest in only stocks

    B. Low fees C. Illiquidity

    D. Hedge funds almost always hedge

    E. Hedge funds use advanced investment strategies and benefit from lax regulation

    E

    Which of the following is true concerning the difference between simple and compound interest?

    A. With compound interest, interest is earned only on the original investment whereas with simple interest, interest is earned on interest.

    B. Simple interest always leads to a higher ending investment value when compared to compound interest.

    C. With simple interest, interest is earned only on the original investment whereas with compound interest, interest is earned on both the original investment and the accumulated interest.

    D. With compound interest, the assumption is that interest earned on the original investment is not reinvested. With simple interest, interest is reinvested.

    E. Simple interest and compound interest always lead to the same ending investment value so there is no difference between the two methods.

    C

    Which of the following is true concerning the difference between simple and compound interest?

    A. With compound interest, interest is earned only on the original investment whereas with simple interest, interest is earned on interest.

    B. Simple interest always leads to a higher ending investment value when compared to compound interest.

    C. With compound interest, interest is earned only on the original investment whereas with simple interest, interest is earned on both the original investment and the accumulated interest.

    D. With simple interest, the assumption is that interest earned on the original investment is not reinvested. With compound interest, interest is reinvested.

    E. Simple interest and compound interest always lead to the same ending investment value so there is no difference between the two methods.

    D

    If you are buying a stock, which of the following ask prices is the most attractive?

    A. 85.75-86.90 B. 85.72-86.87 C. 85.71-86.86 D. 85.77-86.91 E. 85.70-85.83 E

    If you are selling a stock, which of the following bid prices is the most attractive?

    A. 20.60-21.05 B. 20.62-21.07 C. 20.61-21.06 D. 20.67-21.12 E. 20.64-21.01 D

    Your uncle needs $2,400,000 upon retirement in 17 years to live comfortably. He can invest $60,000 a year to his retirement. What interest rate would his investment need to earn in order for him to meet his goals?

    A. 24.2% B. 5.2% C. 13.1% D. 9.9% E. 8.6% D

    Your uncle needs $3,000,000 upon retirement in 22 years to live comfortably. He can invest $50,000 a year to his retirement. What interest rate would his investment need to earn in order for him to meet his goals?

    A. 8.6% B. 20.5% C. 4.7% D. 13.3% E. 9.9% A

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