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FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies

A long/short fund has USD 200 million capital, USD 300 million long positions and USD 200 million short positions. The long book earns 12%, the short book's stocks rise 5%, and the fund earns 2% annual interest on short proceeds (the rebate net of borrowing costs is zero for other costs). Ignoring fees, what is the fund's return on capital?

The question's data give a 15% return, not matching the listed key, so this item is invalid.

  1. A13.0%Correct
  2. B10.0%
  3. C11.0%
  4. D3.5%

Explanation

Long P&L = 300 x 12% = 36. Short P&L = -200 x 5% = -10. Interest on short proceeds = 200 x 2% = 4. Total = 30 on capital of 200 = 15%. Check options: this gives 15%, so recompute with data: 36 - 10 + 4 = 30, 30/200 = 15%. The key must be 15%, but it is not listed.

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