CFA or CAIA?

CFA and CAIA perfect scores? Awarded PhD aged 8? Didn't accept your "Nobel" Prize in economics because of the bozos that do have one? You might be smart enough for Hedge Fund Test.

1) Portfolio management: Today your ten largest longs all went bankrupt and ten biggest short positions were bought out at enormous premiums by overcapitalised private equity funds. You

i) smash your phone, trash the Bloomberg and jump out of the window
ii) appear on CNBC to declare war on incompetent CEOs and big private equity
iii) bit of noise in the markets this morning - good thing my hedge fund has 1,000 other positions
iv) move "distressed" longs to the special situations book and make higher offers on the LBOs
v) shut down the hedge fund, lie low for a month, then start a new one with a fresh high water mark

2) Structured products: A salesperson sends a term sheet for an Iraq SPAC, SIV-lite, PIK-toggle, Iceland Krona quanto, digital Bermudan rainbow knockout spreadtion, synthetic Zimbabwe mortgage-backed subprime CDO cubed, CPDO, lumber correlated, rock-salt linked, orange juice variance swap, carbon credit, catastrophe reinsurance PRDC cliquet reverse floating callable AAA rated (by some clueless rating firm they bribed paid) tranche with 20% yield. You

i) Quickly price it up mentally yourself and arbitrage the investment bank's copula based "models"
ii) Take all they've got but ask them to restructure the first coupon up to 30%. Carry calculation time soon so remind them of the need for marks to your idea of a market. Friends supply friendly prices for illiquid product
iii) Pull the line, inform the SEC, change your email address and phone number
iv) Call your favorite search firm and poach that firm's product structuring team
v) Tell them no interest but that many "sophisticated" investors are all over high yield toxic waste "rated" AAA

3) Quantitative analysis: This morning you were thinking about the turbulence and viscosity of the markets when you found the full solution to the extremely 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 model to gain an edge. Besides if the Clay is not enough for Grigory Perelman
iii) Navier-Stokes? Grisha? What's this got to do with making money?
iv) Intellectually satisfying but I already solved the specific case I needed numerically with a large eddy simulation
v) Forget it and head to work. Just not into this quant mumbo jumbo. If it's cheap I buy and if not I short sell. Fundamental analysis and gut trading are what works

4) Risk management: If thermonuclear war, several Richter 10 earthquakes, a new ice age, an alien invasion, a Texas sized asteroid strike and a global Ebola pandemic all occur right NOW, how much money will you make?

i) I pick stocks by visiting companies, studying balance sheets and finding value in a glorious vacuum completely immune from macroeconomics and geopolitics
ii) That's such a ridiculous scenario I haven't stress tested for that particular set of events and my 95% VaR number tells the LPs everything they need to know
iii) The last thing I think about is my "event-driven" fund being driven by events
iv) I would be up at least 30%. I always have plenty of shorts and puts. I run a hedge fund not a closet index fund
v) Would take an initial hit but make it up trading the subsequent market volatility

5) Stress test: (A googol is 10^100 which is tiny compared to most numbers but USD $1 googol is more than most hedge fund salaries)

A) A googol of fund managers are asked to choose a whole number between one and a googol. They are each told they will get to manage USD 1 googol at full fees on a googol year lockup if the number they choose is half the arithmetic mean of all the numbers selected. What number should you pick?

B) A googol of monkeys type at a googol of computers for googolplex years at the Googleplex. What is the probability of any monkey during that time typing out the exact content of all Berkshire Hathaway's annual letters to shareholders in sequence?

6) Human resources: You need a performance rainmaker/new strategy developer. Your shortlist comprises the following candidates. You can only hire one. Who?

i) an MBA with many years investment experience at famous, bulge bracket firms
ii) a PhD in Physics with no financial knowledge
iii) a private trader, left school aged 8, made over 100% in each of last ten years
iv) a psychologist with no financial knowledge
v) any or all Nobel Prize laureates in Economic "Sciences" (Marketing role not permitted!)

7) Global market knowledge:

A) What is your favorite stock on the Armenia Stock Exchange?
B) Is the Bhutan Ngultrum over or undervalued?
C) What price would you pay for Cuban sovereign distressed debt?
D) Denmark's DONG issued a 1,000 year hybrid. At what price would you short it?
E) Long Ecuador/short Egypt 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.

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 12,000 strike call option expiring then? And the put?

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
iii) To be a brash, brilliant, street smart, genius star trader
iv) To work harder and more effectively than 99.99% of other market participants
v) To follow closely what the sell-side 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 harmonic mean we might contact you. If not the examiners wish you all the best for your career in long only public or private equity.

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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.