Do you also have an upcoming job interview? Are you ready for it? The easiest approach to prepare for an interview is to go through the most frequent interview questions you’ll probably be asked, as well as samples of the finest responses. Knowing what you’re going to say ahead of time might help you relax throughout the interview with our Hedge Fund interview questions.
Hedge Fund Interview Questions
- What are the advantages of hedge fund investing?
Most of the advantages of all such investments include:
- Constant Performance: Because the managers are not limited in their investment methods and have the freedom to invest in any class or instrument, they may aim for consistent and absolute returns. The goal does not have to be to outperform the competition.
- Low Correlation: Because a variety of investment strategies or financial tools are implemented and they may profit in both rising and declining markets, funds can provide returns that are unrelated to traditional investments.
Hedge funds use different hedging methods to protect themselves against deteriorating markets, which may include more diversification.
- What are the main distinctions between hedge funds and mutual funds?
- Mutual Fund – These funds have a low level of regulation. The techniques are aggressive and may not be limited to a certain industry or product. Due to the large investment ticket size, they are typically aimed at HNIs and other large-scale investors.
- Hedge Fund – They are governed. The methods are mostly restricted to investing in the stock market and even to a certain industry. It is targeted at individual investors, and the minimum investment amount is comparatively small.
- What is the formula for calculating the NAV?
The entire market value of all the securities held by the fund is used in the computation. Thereby,
- Futures (both long and short) are calculated as follows: Futures Price * Lot Size * Number of Contracts
- Option price paid * Lot size * Number of Contracts = Option premium paid
- The market price of the underlying * Lot size * Number of Contracts = Options Sold.
In the event of some other derivative liability, it is recommended that this exposure be computed as the contract’s notional market price. The lot size refers to the amount of merchandise that must be acquired and is appropriate for the party making the offer to buy or sell it. For instance, suppose you buy a 50-lot option contract.
- Can you describe the Subscription or Redemption idea in terms of hedge funds?
The investment amount made by an investor to become a part of the hedge fund is referred to as a subscription. Redemption, on the contrary, refers to the money that is dissolved and returned to the investor as a result of the hedge fund’s departure or liquidation. In any scenario, the full money is not distributed in one lump sum, but rather in tranches to ensure seamless fund flow. The Offering Memorandum explains everything in detail (OM). It might take anything from 15 to 180 days for a redemption to be completed.
- What exactly do you mean when you say hedge fund?
A hedge fund is a type of investment pool wherein the investors put money into a pool that is managed by a hedge fund manager. This manager will then invest such funds further to increase their profits. The idea is similar to mutual funds, but it is far more aggressive in terms of maximizing yields.
- Why should small-scale retail investors avoid hedge funds?
Hedge funds generally spend a minimum of $10 million and are willing to lose all of their money if a situation like this occurs. Although the fund management is participating as a partner in such an investment, a high-risk appetite is still required.
Another argument would be that investors will find it difficult to comprehend and maintain track of hedge funds since they might employ various and sophisticated methods to enhance their profits.
- In hedge funds, what is a Master-Feeder structure?
The master-feeder fund would be a common structure used by funds to aggregate taxable and non-taxable assets gathered into a single-vehicle known as a Master Fund. As a result, the assets are divided into two Feeder funds: one for US-based investors and another for non-US-based investors. This sum is subsequently transferred to the Master fund, through which the portfolio investment and trades are made. The feeder fund invests in the ‘maser fund’ in the same way that it invests in almost any other company’s stock. In exchange, it collects the master fund’s whole revenue, including interest, profits, and dividends.
- Could you tell me more about the 2/20 rule?
The hedge fund managers use a 2/20 pay structure that is based on the hedge fund’s success. This term will emphasize how hedge fund managers charge a fixed management fee of 2% of total asset value and an extra 20% of overall profits produced. As a result, the Management Fee is a compulsory payment that is required to administer the fund, whereas performance fees are a bonus to the fund manager for achieving returns greater than the fund’s value.
- What are your thoughts on Side-pocket Funds?
Those are all distinct funds used to store illiquid assets from the funds’ other liquid investments. These funds are not open to all investors and are intended for those who are interested at the time of their formation. Until these securities are liquidated, the investment is usually frozen. Because the value of these securities may not be accessible, they may be valued at cost and kept flat across the board. Costs from Bloomberg might also be used.
- What is the difference between a long and short equity strategy
Most hedge funds use this strategy, in which investors take long and short positions in two rival companies within the same industry depending on their mutual esteem. Because the purchase and sale can give profits, and the worst case will at least assist balance the losses, the combined portfolio generates additional chances for stock-specific gains and minimizes market risk. It is indeed a low-risk leveraged wager that’s seen as a progression of pair trading.
- What are some of the downsides of using derivatives?
The following are the potential risks:
- Market risk is a type of risk that develops when price changes influence the stock market’s movement.
- Counterparty risk is the danger of one or both parties failing to fulfill their contractual obligations.
- Investors shut off derivative contracts before maturity, posing a liquidity risk.
- As a result, parties may be separated from their liquidity earlier than planned.
- Because determining the price of the underlying security is difficult, pricing risk exists.
- Is there a clawback provision in hedge funds?
Yes, hedge funds can contain a clawback provision, which allows the Limited Partner to call back any dividend or carry amount paid on earlier portfolio investments over the fund’s existence to bring the returns back to the promised or originally agreed on %. It would not be necessary to call back the full amount, but a provision is given by which the hedge might be called back.
- What is the significance of a Memorandum of Offering?
An Offering Memorandum is similar to a Hedge Fund Prospectus. It is indeed a regulatory document that outlines the hedge fund’s objectives, risks, and terms and conditions. In the OM, all of the facts are spelled out in great detail. As a result, the fund management informs the potential investor about the fund’s setup and strategies. The necessary minimum investment as well as the risk appetite is mentioned explicitly within OM and therefore should be reviewed by the investor before making any decisions. The liquidation and clawback clauses are also detailed in this document.
- Identify some of the industries in which the hedge fund will typically invest.
The hedge fund can invest in any financial product it wants, but it will mostly depend on the strategy it employs. In most cases, the investment will be made in:
- Shares of Stock
- Futures & Forwards
- Contracts of Swap
- Real Estate Investment Trust
- Exchange Rates Trading to profit from changes in currency exchange rates
- Shares are sold privately.
- What’s a Fund of Funds, and how does it work?
It’s a hedge fund that invests in hedge funds. The advantage is that an investor will receive a taste of a variety of hedge fund techniques as well as diversity. They’re set up as a limited partnership, which gives investors the benefit of restricted liability.
- How do Forwarding and Future Contracts differ?
Forwards and futures are both financial transactions, although they differ in a few ways:
- Futures Forwards – Exchanged on a market: Both parties have the exchange clearinghouse as their counterparty. The counterparty’s risk will be reduced as a result. It is also possible to transfer the duty to another party. Positions are marked to market daily, with players obliged to maintain margins regularly.
- Forwards – Over-the-Counter (OTC): There is no such system of trade and contract between the persons involved. Settlement on delivery means that the gain or loss has only been realized after the transaction is completed. Credit exposure continues to rise. As a result, the loss caused by default is more significant.