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Hedge Fund Test

Hedge Fund Test

1) Risk management: Today, if global thermonuclear war, a 100% fatal contagious virus, several Richter 12 earthquakes, a new ice age, an alien invasion, another zombie apocalypse and a giant asteroid vaporizes this tiny 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 didn'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 LPs all they need to know

D) Would be up a lot. 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 Space. Planetary bias is almost as dumb as national bias. Almost.

2) Quantitative analysis: Today you were thinking about the turbulence and viscosity in the markets when you stumbled onto the complete solution to the Navier-Stokes equations. You

A) Publish to worldwide acclaim, another Fields medal and the $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 a large eddy simulation

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

3) 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 Argentine Peso denominated Z-tranche. You:

A) Mentally price it up yourself and arbitrage the bank's derivative mispricing 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 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 clueless ratings firms bribed to do so

4) Deductive reasoning: Hint: A googol is 10^100, a tiny number. A googolplex, 10^googol, is also very small. Almost all numbers are much, much bigger

A) A googol of hedge fund 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 numbers that were selected. What number should you pick?

B) A googol of monkeys type at a googol of computers for googolplex years. What is the expected wait time until a monkey types out the 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 marketing

B) machine learning computer scientist with no financial knowledge

C) private trader, uneducated, illiterate, made over +100% return per year net of 5 and 50 fees in each of the past 50 years with no negative 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: Today your ten biggest long positions all went bankrupt and your ten largest shorts were LBO'd for 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 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 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 haul. Stock indices in some countries have even risen over time. In several others they fell to zero, wiping out passive pimps.

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

B) What is your bid today for a Dow 30,000 strike call option expiring then? Your offer?

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 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 sells-side 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, percentage of total portfolio, level of conviction on each trade and what hedges do you have in place?

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

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


To source 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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