Answer-first summary for fast verification
Answer: Merger arbitrage funds buy the stock of an acquisition target company and simultaneously short the bidding company's stock. These funds have large exposure to deal risk.
## Explanation The incorrect statement is **Option C**. **Why Option C is incorrect:** - Merger arbitrage funds typically buy the stock of the target company and short the stock of the acquiring company, but this is not always the case. In many merger arbitrage strategies, funds only take a long position in the target company without shorting the acquirer. The primary risk exposure is indeed deal risk (the risk that the merger fails to complete), but the statement incorrectly suggests that shorting the bidding company's stock is always part of the strategy. **Analysis of other options:** - **Option A**: Correct - Equity market neutral funds do aim for low correlation with overall equity markets and seek to insulate from broad market risk factors through hedging. - **Option B**: Correct - Convertible arbitrage funds typically buy convertible securities and short the underlying stock, earning returns from gamma trading on volatility. - **Option D**: Correct - Equity short-selling funds do sell stocks they don't own to take short positions, betting on price declines. The incorrect statement in Option C lies in the assertion that merger arbitrage funds "simultaneously short the bidding company's stock" as this is not a universal practice in merger arbitrage strategies.
Author: LeetQuiz .
Ultimate access to all questions.
A fund of hedge funds combines a mix of strategy sectors, managers, and styles, and therefore fund of funds risk managers need to understand the common attributes of hedge fund strategies. Which of the following statements is incorrect?
A
Equity market neutral funds aim to generate returns that have low correlation with the overall equity market and to insulate their portfolios from broad market risk factors.
B
Convertible arbitrage funds typically purchase securities that are convertible into the issuer's stock and simultaneously short the underlying stock. These funds earn returns in part form gamma trading on the stock's volatility.
C
Merger arbitrage funds buy the stock of an acquisition target company and simultaneously short the bidding company's stock. These funds have large exposure to deal risk.
D
Equity short-selling funds sell stocks not currently owned by the seller in order to take a short position.
No comments yet.