SIE Understanding Products and Their Risks Question 81: Answer and Explanation

Question: 81

Which of the following statements is true regarding hedge funds' expenses?

• A. Hedge fund expense ratios are identical to that of the average mutual fund.
• B. Hedge funds spend proportionately less to research investment opportunities than the average mutual fund.
• C. Hedge funds may incur more cost by purchasing derivatives that a typical mutual fund manager does not purchase.
• D. Hedge funds pay the investment managers less compensation than a typical mutual fund does.

Correct Answer: C

Explanation:

C: Choice C is correct because hedge funds may regularly incur more transaction costs, purchasing derivatives such as options to buy or sell investments that most mutual fund managers would not. Options that are not exercised would result in costs that could increase the expense ratio above that of mutual funds. Choice A is incorrect because research costs and managers' fees are generally higher for hedge funds than for the typical mutual fund. Choice B is incorrect because hedge funds typically research non-traditional investments for which data is not so readily available as those investments analyzed by typical mutual fund investment managers. Choice D is incorrect because the expectation of higher than market returns generally results in hedge fund managers receiving higher fees than the average mutual fund investment manager.