Skip to content

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

A pension fund holds a managed futures allocation alongside a large equity portfolio. In its risk review it notes that the CTA allocation performed well in past equity bear markets. Which characterization best explains this feature and its limitation?

Managed futures funds can go short, so sustained market declines often produce trend profits and diversification against equities. The benefit is not guaranteed: sudden crashes followed by sharp reversals can produce losses before models adjust, so the relationship is not perfect negative correlation.

  1. ACTAs hold put options on equities permanently, so they always gain when equities fall
  2. BTrend followers can go short and so may profit from extended declines, but fast reversals or abrupt crashes can leave them unable to adjust in timeCorrect
  3. CCTAs are perfectly negatively correlated with equities in every period
  4. DCTAs invest only in government bonds, which always rise when equities fall

Explanation

Managed futures can take short positions and often profit from sustained drawdowns, giving crisis-period diversification (a straddle-like payoff). The benefit depends on trends persisting; sudden sharp reversals can cause losses. The other options assert guaranteed hedges or wrong holdings.

Did you get it right without looking?

One question tells you little. A timed set on Hedge Fund Investment Strategies shows your real accuracy, how long you take and where you lose marks.

Practise Hedge Fund Investment StrategiesFree diagnostic mock

More Hedge Fund Investment Strategies questions