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Hedge Fund Test

Hedge Fund Test is the toughest investment credential to obtain. Skilled investors score 100% on the HFT but the mode is 0%. How will you do? It takes inherent ability and minimum 50,000 hours full time short/long investing experience to BECOME skilled and 100 hour weeks to remain so. Are you a rare alpha star or just another beta bandit?

1) Quantitative analysis: This morning you were thinking about the turbulence and viscosity in the markets when you stumbled on the full solution to the notoriously difficult 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 trading algorithm to gain an edge
iii) Navier-Stokes? Viscosity? 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 about it. Just not into quant mumbo jumbo. If it looks cheap I buy, if not I short sell. Fundamental analysis and gut trading are what work

2) Deductive reasoning: Googol is 10^100, a tiny number. Googolplex, 10^googol, is also very small. Almost all numbers are much, much bigger.

A) A googol of portfolio managers are asked to choose a whole number between zero and a googol. They are each told they will get to manage USD 1 googol for googol year lockup if the number they choose is half the arithmetic mean of all the numbers that were selected. What number do you pick?

B) A googol of monkeys type at a googol of computers for googolplex years at the Googleplex. What is the probability of a monkey typing out the exact content of hedge fund Berkshire Hathaway's annual letters to investors?

3) Human resources: You need to recruit a performance rainmaker. Your shortlist comprises the following candidates. You can only hire one. Who?

i) proprietary investor with many years experience at bulge bracket firms
ii) computational astrophysicist with no financial knowledge
iii) day trader, uneducated and illiterate, not team player, made over +100% audited return after 2 and 20 fees in each of past 20 years, no losing months
iv) psychologist with no financial knowledge
v) "Nobel" prize laureate in Economic "Sciences"

4) Market linked: You receive a term sheet for a 20% yield AAA rated Iraq 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 Somali convertible preferred Delta One Syria Z-tranche. You:

i) Mentally price it yourself and arbitrage the bank's copula based models
ii) Take all they've got but ask them to restructure the coupon up to 30%, reminding them of the need for marks to - your idea of a - market
iii) Pull the line, inform the SEC, change your name, address and phone number
iv) Call your favorite recruiter and poach the bank's product structuring team
v) Tell them to contact "sophisticated" investors that crave high yield toxic waste declared "AAA" by some clueless firm bribed to rate it

5) Portfolio management: Today your ten biggest long positions all went bankrupt and your ten largest shorts were bought out for enormous premia by overcapitalized private equity firms aka failed hedge fund wannabes. You

i) smash your phone, trash the Bloomberg and jump out of the window
ii) write op-eds for the WSJ and FT on "broken markets", appear on CNBC and schedule several conference keynote gigs
iii) some noise in the markets today - good thing my diversified hedge fund actually is diversified and properly hedged
iv) move the "distressed" longs to the illiquid special situations side pocket and make higher offers on the LBOs
v) shut down my fund, go on a month vacation, then start a new one with a fresh name and high water mark

6) Risk management: Today if global thermonuclear war, a Richter scale 12 earthquake, a new ice age, an alien invasion, another zombie apocalypse and a giant asteroid vaporizes your city, you:

i) I pick stocks by analyzing companies, studying income statements, balance sheets and cash flows to find value in a glorious vacuum immune from macro
ii) I don't think about my "event-driven" hedge fund being driven by events
iii) Ridiculous scenario so I haven't stress tested for that particular set of factors and the 95% VaR number tells the LPs all they need to know
iv) Would be up a lot. Always have plenty of shorts and puts. I run an absolute return fund. It's my job to prepare for all scenarios, however unlikely 
v) Might take an initial hit but make it up trading volatility. I've been diversifying into space-focused businesses. Planet bias is almost as dumb as national bias

7) Basic 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 would you short?
E) Long Estonia/neutral Egypt/short Ecuador or vice versa?

8) Market outlook: Investors are urged to bet on equities for the long haul. Stock indices in some countries have generally risen over time. In several others they fell to zero, wiping out passive funds.

A) What is the likeliest price for the Dow Industrials index in one billion years?
B) What would you pay now for a European-style Dow 18,000 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 the strategists, economists and analysts are saying

10) Experience: From memory what were your ten best and ten worst investments 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 plan B career in long only private equity where the fees 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.

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