Hedge Funds & Alternatives
Funds that may go short, use leverage and hold instruments an index does not contain — organised by the idea they are expressing rather than by the asset class it lives in.
Buy-Side: Decides whether to take it. the whole map
The seats
six of them, each answering the same six questions so that they can be read against each other.
Next to it
The other groups on the same side of the price.
Asset Management Private Markets Wealth Management Insurance & Pensions
What an interview asks here
These questions are checking whether you can state a strategy as a risk taken deliberately, and name what removes it.
Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.
Q1What does market-neutral actually mean, and what does it not remove?
What it is checking. A term used loosely, and the residual risks are the interesting part.
A complete answer contains:
- It means the book has little sensitivity to the direction of the overall market, usually by pairing longs against shorts.
- It does not remove factor risk: the longs and shorts can differ systematically in size, value, momentum or sector.
- It does not remove financing risk, borrow risk on the shorts, or crowding.
- So a neutral book can be enormous gross and lose money on a day the index barely moved.
Read it properly: Long/short equity · Where the leverage hides
Q2A merger spread is four per cent with two months to closing. What does that tell you?
What it is checking. Reading a price as an implied probability, which is what the seat does all day.
A complete answer contains:
- Annualised it is a much larger number, so the first step is to put it on a comparable basis.
- It is not free money: it is the market's price for the chance the deal breaks and the shares fall back.
- To read a probability from it you need an estimate of where the shares trade if it fails, which is the harder half.
- And the payoff is asymmetric — small frequent gains against rare large losses — so position size is the real decision.
Read it properly: Event driven · What kills a deal
Q3Why is a relative value book more fragile than it looks?
What it is checking. The leverage that a small edge requires, and what that does to a drawdown.
A complete answer contains:
- The gap between two nearly identical instruments is small, so it takes leverage to make it a return.
- Leverage means the position is sized against a lender's willingness rather than against the market.
- So the spread can widen before it converges, and being right eventually is no defence against a margin call today.
- And everybody holds the same pair, so the unwind is a divergence rather than a convergence.
Read it properly: Relative value · 1998
Q4How does a backtest lie?
What it is checking. The systematic question, and it wants specific mechanisms rather than scepticism.
A complete answer contains:
- Overfitting: enough parameters tested on one history will find a rule that describes it and predicts nothing.
- Survivorship and look-ahead: testing on the names that still exist, or using data that was not available at the time.
- Ignoring cost: a signal that trades often can be profitable gross and negative after spread and impact.
- And capacity: a rule that works on small size stops working at the size that would make it worth running.
Read it properly: Quantitative and systematic · What liquidity costs
Q5In distressed, what decides the outcome more than the business does?
What it is checking. The document, and whether you know to read it before forming a view.
A complete answer contains:
- Where the claim sits: which entity issued it, what it is secured on, and what ranks ahead of it.
- Structural seniority — debt at an operating company sits ahead of debt at the parent whatever either document says about ranking.
- What the agreement permits: assets that can be moved, or new debt that can be put in front.
- Two lenders to the same company can therefore have entirely different outcomes, and that is the analysis.
Read it properly: Distressed and special situations · 2020
Q6What is the fee structure actually paying for, and what does it distort?
What it is checking. Incentives, stated plainly rather than avoided.
A complete answer contains:
- A management fee funds the operation; a performance fee pays a share of gains above a threshold.
- The performance fee is an option: the manager participates in the upside and does not repay the downside.
- A high-water mark limits that by requiring past losses to be recovered first — without one, volatility itself is profitable to the manager.
- So the terms to read are the hurdle, the high-water mark, and whether fees are charged on gross or net exposure.
Read it properly: Hedge funds · Costs and fees
Q7What does a prime broker give a fund, and what does it take?
What it is checking. The relationship that decides how much leverage a fund can actually run.
A complete answer contains:
- It finances long positions, sources the borrow for shorts, clears and settles, and reports the whole book.
- In exchange it sets the margin, which is the real limit on the fund's leverage and is negotiated rather than given.
- It can change those terms, and it will do so when it is most inconvenient.
- Which is why funds run several and why no single broker can see the whole picture.
Read it properly: Prime services · 2021
Do these against a clock — one at a time, ninety seconds each, answer before you look.
Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.
Test yourself: five questions
Five quick questions on this part of the industry — checked entirely on your device, nothing stored or sent. Wrong answers come with explanations, and the seat pages above hold every answer. For education only.