- CFA Exams
- CFA Level I Exam
- Topic 8. Alternative Investments
- Learning Module 2. Alternative Investment Performance and Returns
- Subject 1. Issues in Performance Appraisal
CFA Practice Question
What is the most significant factor causing hedge funds to make either larger than normal returns or significant losses?
B. leverage.
C. lack of regulation.
A. Hefty incentive fees (e.g., 20%).
B. leverage.
C. lack of regulation.
Correct Answer: B
Hedge funds leverage their portfolios by borrowing external funds and/or using financial instruments and derivatives that require posting margins. By using margins, hedge funds only pay a fraction of the value of the position.
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