Hedge Fund Strategies

Correct Answer: The lack of regulatory oversight and the potential for market manipulation in the cryptocurrency space, which could lead to sudden and significant price movements that may be difficult to anticipate or manage.

The primary risk factor that the hedge fund manager should be most concerned about when implementing a cryptocurrency investment strategy is the lack of regulatory oversight and the potential for market manipulation in the cryptocurrency space. This could lead to sudden and significant price movements that may be difficult to anticipate or manage.

The relatively unregulated nature of cryptocurrency markets makes them more susceptible to fraud, manipulation, and other illicit activities. The absence of a robust regulatory framework can create an environment where bad actors can engage in market manipulation, such as pump-and-dump schemes or insider trading, which can result in artificial price volatility and significant losses for investors.

While the possibility of a major cryptocurrency exchange being hacked or compromised is a valid concern, it is not the primary risk factor in this context. Such an event could lead to the loss of the fund's digital assets and impact market sentiment, but it is not as systemic as the lack of regulatory oversight and potential for market manipulation.

The risk of the fund's analysis and trading models not accurately predicting future price movements is inherent in any investment strategy, particularly in highly volatile and speculative markets like cryptocurrencies. However, this risk can be mitigated to some extent by the fund's experienced team of traders and robust risk management system. In contrast, the lack of regulatory oversight and potential for market manipulation are external factors that the fund has limited control over, making them the primary risk factors to consider.

Correct Answer: Interest rate risk, as rising interest rates can increase borrowing costs for REITs and potentially lead to lower property valuations and share prices.

The hedge fund manager is most likely to prioritize interest rate risk when implementing a REIT-focused strategy. REITs often rely on debt financing to acquire and manage properties, making them sensitive to changes in interest rates. Rising interest rates can increase borrowing costs for REITs, potentially leading to lower property valuations and share prices. This can negatively impact the returns of the hedge fund's REIT portfolio.

Concentration risk is less of a concern in this case, as the manager is investing in a diversified portfolio of REITs across various property sectors. This diversification helps mitigate the impact of potential downturns in specific real estate markets.

Liquidity risk is also not a primary concern, as REITs are publicly traded securities that can be bought and sold on stock exchanges, providing a relatively liquid investment option compared to direct real estate investments.

Correct Answer: Event-driven strategy

The event-driven strategy involves investing in securities that are expected to be affected by a specific corporate event, such as a merger, acquisition, or bankruptcy. This strategy seeks to profit from the pricing inefficiencies that may occur before or after such corporate events. The global macro strategy focuses on profiting from broad economic and political trends, rather than specific corporate events. The equity market neutral strategy seeks to exploit pricing inefficiencies between related equity securities while neutralizing exposure to market risk, but it does not specifically target securities affected by corporate events.