Hedge Fund Test?

CFA and CAIA perfect scores? You might be smart enough to take Hedge Fund Test.

1) Portfolio management: Today your ten largest longs all went bankrupt and ten biggest shorts were bought out at enormous premiums by overcapitalised private equity funds. You

i) shut down your hedge fund, lie low for a month, then start marketing a new one
ii) smash your phone, trash your Bloomberg and jump out of the window
iii) appear on CNBC to declare war on incompetent CEOs and big private equity
iv) some noise in the markets today - glad I have 1,000 other positions and hedge risk properly
v) move the longs to the special situations book and then make higher offers on the LBOs

2) Structured products: A salesperson calls offering a SPAC, SIV-lite, PIK-toggle, Iceland Krona quanto, digital Bermudan rainbow knockout spreadtion, synthetic Zimbabwe mortgage-backed subprime CDO cubed, CPDO, lumber correlated, rock-salt linked, orange juice variance swap, carbon credit, catastrophe reinsurance reverse floating callable AAA "rated" tranche with 20% yield. You

i) Quickly price it up yourself and arbitrage the investment bank's "models"
ii) Take all they've got but ask them to restructure the first coupon up to 30%
iii) Pull the line, inform the SEC, change your email address and phone number
iv) Call your favorite search firm and poach the bank's product structuring team
v) Tell them no interest but that many other funds are all over that kind of toxic waste

3) Quantitative analysis: This morning you were thinking about the turbulence and viscosity of the markets when you found the full solution to the Navier-Stokes equations. You

i) Publish to worldwide acclaim, a Fields medal and the $1 million Clay mathematics prize
ii) A day's pay? I'd prefer to keep it to myself and perhaps use the ideas in a model to gain an edge. Besides if the Clay is not enough for Grigory Perelman
iii) Navier-Stokes? Grisha? What's this got to do with making money?
iv) Intellectually satisfying but I already solved the specific cases I needed numerically with a large eddy simulation
v) Forget it and head to work. Just not into this quant mumbo jumbo. If it looks cheap I buy and if not I short sell. Fundamental analysis is what works

4) Risk management: If thermonuclear war, several Richter 10 earthquakes, a new ice age and a global Ebola pandemic occur right now, how much money will you make?

i) I pick stocks by visiting companies, studying balance sheets and finding value in a glorious vacuum completely immune from macroeconomics and geopolitics
ii) That's such a ridiculous scenario I haven't stress tested for that particular set of events and the 95% VaR number tells the LPs everything they need to know
iii) The last thing I'd be thinking about is my "event-driven" fund being driven by events
iv) I would be up at least 25%. I hedge and always have plenty of shorts and puts
v) Would take an initial hit but make it up trading the subsequent market volatility

5) Stress test: (A googol is 10^100 which is tiny compared to most numbers)

A) A googol of fund managers are asked to choose a whole number between one and a googol. They are each told they will get to manage USD 1 googol at full fees if the number they choose is half the arithmetic mean of all the numbers selected. What number should you pick?

B) A googol of monkeys type at a googol of computers for googolplex years at the Googleplex. What is the probability of any monkey during that time typing out the exact content of all Berkshire Hathaway's annual letters to shareholders in sequence?

6) Human resources: You need a performance rainmaker/new strategy developer. Your shortlist comprises the following candidates. You can only hire one. Who?

i) an MBA with many years investment experience at bulge bracket firms
ii) a PhD in Physics with no financial knowledge
iii) a private trader, left school aged 8, made over 100% in each of last ten years
iv) a psychologist with no financial knowledge
v) a Nobel Prize laureate in Economic "Sciences"

7) Global market knowledge:

A) What is your favorite stock on the Armenia Stock Exchange?
B) Is the Bhutan Ngultrum is over or undervalued?
C) What would you pay for Cuba distressed debt?
D) Denmark's DONG issued a 1,000 year hybrid. At what price would you short it?
E) Long Ecuador/short Egypt or vice versa?

8) Market outlook: Investors are urged to bet on equities for the long haul. Stock indices so far have generally risen over time.

A) What is the likeliest price for the Dow Industrials in one billion years?
B) What would you pay for a European-style Dow 10,000 strike call option expiring then? And the put?

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

i) To be really, really intelligent. Really
ii) To use common sense
iii) To be a brash, brilliant, street smart, genius star trader
iv) To work harder and more effectively than 99.99% of other market participants
v) To follow closely what the sell-side strategists, economists, Cramer and analysts are saying

10) Experience: From memory what were your ten best and ten worst trades 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 and stop loss point, percentage of total portfolio and what hedges do you have in place?

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

If you score six sigma above the median we might contact you. If not the examiners wish you all the best for your career in private equity.

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To source good 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">hedge funds.

by Veryan Allen. Copyright

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