Hedge Fund CFA?

Hedge Fund Test. 

Will you pass? One attempt only. No retakes permitted.

In the unlikely event you score six sigma above the average, we might contact you. If not the examiners wish you all the best for your plan B career in pirate equity.

1) Hybrid investments:

 

You receive a term sheet for AAA rated 20% yield CLO cubed SPAC, SIV-lite, PIK-toggle, Venezuelan Bolivar quanto, digital Bermudan rainbow knockout spreadtion, synthetic mortgage-backed subprime CPDO, lumber correlated, rock-salt linked, orange juice variance swap, carbon credit, catastrophe reinsurance PRDC cliquet reverse floating callable convertible preferred Somali Shilling Z-tranche. You:

A) Mentally price it up yourself and arbitrage the investment bank's derivative mis-pricing models

B) Take all they've got but ask them to restructure the coupon up to 30%, reminding them of the need for mark to - your idea of a - market

C) Pull the line, inform the SEC, change your fund's name, email address, Bloomberg ID and phone number

D) Call your favorite search firm recruiter and poach the bank's structured products team

E) Tell them to email "sophisticated" investors craving high yield toxic waste "securities" declared AAA by "expert" ratings firms bribed to do so. Provide them Vanguard's phone number.

 

 

2) Risk management:

 

Today, if global thermonuclear war, a 100% fatal coronavirus, several Richter 11 earthquakes, a new ice age, an alien invasion, a zombie apocalypse and a giant asteroid vaporizes this miserable little planet, you:

A) I pick stocks by analyzing companies, studying income statements, balance sheets and cash flows to find value in a glorious vacuum immune from macro factors

B) I don't expect my "event-driven" hedge fund to be driven by events

C) Ridiculous scenario so I haven't stress tested for that particular set of factors and the 95% VaR and cVar tells our LPs and their clueless advisors/consultants all they need to know

D) Very profitable. I always have many shorts and puts. I run an absolute return fund. It's my job to anticipate and prepare for every possible scenario

E) Might take an initial hit but make it up trading subsequent turbulent markets. I've also been diversifying into outer space. Planetary bias is almost as dumb as national bias. Almost.

3) Quantitative analysis:

 

You were thinking about the turbulence and viscosity in the markets when you stumbled upon the complete solution to the Navier-Stokes equations. You

A) Publish to worldwide acclaim, another Fields medal and $1 million Clay mathematics prize

B) A day's pay? I'd prefer to keep it to myself and perhaps use the ideas to gain an edge

C) Viscosity? Navier-Stokes? What's that got to do with making money?

D) Intellectually satisfying but I already solved specific cases I needed numerically with large eddy simulations

E) Forget about it. Just not into quant/math geek stuff. If it looks cheap I buy, if not I short sell. Fundamental analysis and gut trading drive my work

4) Deductive reasoning: 

 

Hint: Googol is 10^100, a tiny number. Googolplex, 10^googol, is also very small. Most numbers are much, much bigger than them or TREE(3)

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

B) A googol of monkeys type at googol computers for googolplex years. What is the expected wait time until someone types out exact content of all hedge fund Berkshire Hathaway's annual letters to investors from 1957, in sequence?

5) Human resources: 

 

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

A) "Nobel" prize laureate in Economic "Sciences", who can't/won't do capital raising/client relations and is not Myron Scholes

B) artificial intelligence large language model machine learning computer scientist with no financial knowledge

C) 100 year old private trader, uneducated, illiterate, non-team player, made over +100% return per year net of 5 and 50 fees in each of past 50 years with zero negative months, 600 profitable months

D) psychologist with no financial knowledge

E) proprietary trader with many years experience at bulge bracket Wall Street banks, front running client orders/deal flow, analyst upgrades and prime brokerage data flowing over "Chinese Walls"

6) Portfolio management:

A few minutes ago your ten biggest long positions all went bankrupt and your ten largest shorts were LBO'd at enormous premia by overcapitalized private equity funds. You

A) smash your phone, trash the Bloomberg and jump out of the window

B) write op-eds for the WSJ and FT on "broken markets", appear on CNBC and schedule several conference keynote gigs

C) some noise in the markets today - good thing my diversified hedge fund actually is diversified and properly hedged

D) move the "distressed" longs to the illiquid special situations side pocket and launch higher offers on all the LBOs

E) shut down fund, go on a month vacation, then start a new fund with a new name and new high water mark 

7) Basic market knowledge:

A) What is your favorite stock on the Armenia Stock Exchange?

B) Is the Bhutan Ngultrum now overpriced or undervalued?

C) What price would you pay for Cuban yen-dominated sovereign 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 term. Stock indices in some countries have even risen over time. In several others they fell to zero.

A) What is the likeliest price for the Nasdaq index in one billion years?

B) What is your bid/offer today for a Nasdaq 30,000 strike call option expiring in a billion years?


9) Forecasting:

To make consistent absolute returns at low risk the one thing that is truly necessary is:

A) To be really, really intelligent. Really

B) To use common sense, since it is not very common

C) To be a brash, brilliant, street smart, genius star day trader who does "size"

D) To work harder and more effectively than 99.99% of "professionals"

E) To follow closely what the strategists, economists and sell-side analysts are saying


10) Investing experience:

A) Please list 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 each trade? 

B) From memory what are NOW your current ten largest short and ten largest long positions, their average entry price, percentage of portfolio, level of conviction on each trade and hedges do you have in place?

******** End of Test ********