Hedge fund test
iii) Ridiculous scenario so I haven't stress tested for that particular set of risk factors and the 95% VaR number tells LPs all they need to know
3) Market-linked products: You receive a term sheet for a 20% yield AAA rated Iraqi SPAC, SIV-lite, PIK-toggle, Venezuelan Bolivar quanto, digital Bermudan rainbow knockout spreadtion, synthetic Zimbabwe mortgage-backed subprime CDO cubed, CPDO, lumber correlated, Afghan rock-salt linked, orange juice variance swap, carbon credit, catastrophe reinsurance PRDC cliquet reverse floating callable North Korean convertible preferred Delta One Z-tranche. You:
4) Portfolio management: Today your ten biggest long positions all went bankrupt and your ten largest short sells were bought at enormous premiums by overcapitalized private equity funds. You
i) smash your phone, trash the Bloomberg and jump out of the window
ii) write articles for the FT and WSJ on "broken markets", appear on CNBC and schedule several conference keynote gigs
5) Quantitative analysis: This morning you were thinking about the turbulence and viscosity of the markets when you found the complete solution to the Navier-Stokes equations. You
i) Publish to worldwide acclaim, a Fields medal and the $1 million Clay mathematics prize
ii) A day's pay? I'd prefer to keep it to myself and perhaps use the ideas in a non-linear model to gain an edge
iii) Navier-Stokes? What's that got to do with making money?
iv) Intellectually satisfying but I already solved the specific cases I needed numerically with a large eddy simulation
v) Forget it and head to work. Just not into quant mumbo jumbo. If it's cheap I buy, if not I short sell. Fundamental analysis and gut trading are what work
6) Deductive reasoning:
7) Global market knowledge:
A) What is your favorite stock on the Armenia Stock Exchange?
B) Is the Bhutan Ngultrum overpriced or undervalued?
C) What price would you pay for Cuban sovereign yen denominated debt?
D) Denmark's DONG issued a 1,000 year hybrid. At what price do you short?
E) Long Estonia/short Ecuador or vice versa?
8) Market outlook: Investors are urged to bet on equities for the long haul. Stock indices in a few countries have generally risen over time. In several others they fell to zero.
A) What is the likeliest price for the Dow Industrials in one billion years?
B) What would you pay today for a European-style Dow 16,000 strike call option expiring then?
9) Forecasting: To make consistent absolute returns at low risk the one thing that is truly necessary is:
i) To be really, really intelligent. Really
ii) To use common sense since it is not so common
iii) To be a brash, brilliant, street smart, genius star trader
iv) To work harder and more effectively than 99.99% of "professionals"
v) To follow closely what strategists, economists and analysts are saying
10) Experience: From memory what were your ten best and ten worst trades and the exact levels of entry and exit and precise ex ante reasons for the trade? Also from memory what are your ten largest current positions, their average entry price and stop loss point, percentage of total portfolio and what hedges do you have in place?
******** End of Test ********
If you score six sigma above the heronian mean we might contact you. If not the examiners wish you all the best for your career in mutual funds where the fee you "earn" will be vastly higher than the value you deliver.
To source good employees technology companies often use such questions; Google has the Google job test and Microsoft asks people how they would move Mount Fuji. The Hedge Fund Test does similar psychometric analysis for hedge funds.