CFA Level I · CFA Level I Exam · Hedge Funds
A fund manager runs a long/short equity fund that is typically 90% long and 40% short, with returns driven by security selection and some market exposure. Compared with an equity market neutral fund, this fund's returns are most likely to have:
The fund will most likely show higher sensitivity to market direction. Its net long exposure of 50% (90% long minus 40% short) leaves substantial market beta, whereas an equity market neutral fund deliberately offsets longs and shorts to hold net exposure near zero.
- Alower sensitivity to the equity market's direction
- Ba net exposure that is zero by design
- Chigher sensitivity to the equity market's directionCorrect
Explanation
Net exposure is 90% - 40% = 50% long, so the fund carries a positive market beta. A market neutral fund targets net exposure near zero. The first option reverses the relationship, and the second describes market neutral funds.
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