Skip to content

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

An allocator is considering adding a managed futures CTA to a portfolio of equity long/short and credit hedge funds. Which characteristic of CTA returns most supports the allocation as a diversifier during equity market crises?

The key diversification feature is convex, crisis-alpha-like payoffs. Because trend-following CTAs can switch to short positions, they can profit from sustained market declines, offsetting losses in equity-linked hedge funds during prolonged crises, though not in sudden reversals.

  1. ALong-only exposure to equity index futures
  2. BConvex, crisis-alpha-like payoffs because trend followers can go short and benefit from sustained falling marketsCorrect
  3. CA fixed positive correlation to credit spreads
  4. DGuaranteed returns from the futures roll yield

Explanation

CTAs can take short positions and, when declines are persistent, trend signals flip short and capture the move, giving option-like (convex) payoffs in prolonged crises. They are not long-only, have no fixed correlation to credit, and roll yield is not guaranteed.

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