CFA Practice Question

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CFA Practice Question

What is the most significant factor causing hedge funds to make either larger than normal returns or significant losses?

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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