SIE Understanding Products and Their Risks Question 28: Answer and Explanation

Question: 28

Which of the following most closely relates to illiquidity of a hedge fund's assets?

• A. Use of derivatives
• B. Number of years during which the fund manager has managed those types of assets
• C. Calculation method for the performance fee
• D. Discretion allowed the hedge fund for asset valuation

Correct Answer: D

Explanation:

D: Hedge funds may invest in assets without a ready market, hindering frequent and accurate valuation. Use of derivatives, Choice A, may still allow liquidity because many derivatives and their underlying securities are traded on national exchanges. The number of years during which the fund manager has managed those types of assets, Choice B, would typically have no correlation to the liquidity of fund assets. The calculation method for the performance fee, Choice C, is only indirectly related to the liquidity of the assets.