Chartered Financial Analyst Level 2

Explanation

Among the three hedge fund strategies listed:

• Managed futures (A): These strategies trade highly liquid futures contracts on exchanges, making them relatively liquid with low liquidity risk.

• Long/short equity (B): These strategies trade publicly listed stocks, which are generally liquid securities with moderate liquidity risk.

• Convertible bond arbitrage (C): This strategy involves trading convertible bonds, which are typically less liquid than stocks or futures. Convertible bonds are hybrid securities that combine features of both bonds and stocks, and they often trade in less liquid markets. Additionally, arbitrage strategies may require holding positions for extended periods to realize pricing discrepancies, further increasing liquidity risk.

Therefore, convertible bond arbitrage most likely has the highest liquidity risks due to the nature of the underlying securities and the strategy implementation.