medium · FRM Part 2 Risk & Investment Management
A fund manager claims their high returns come from 'proprietary alpha.' During the ODD process, the analyst discovers the fund's returns load 0.9 on a short-VIX-futures factor. This suggests the fund is primarily earning:
- True idiosyncratic alpha generated purely from the manager's proprietary stock-picking and security-selection acumen.
- Arbitrage profits that are essentially riskless and structurally non-correlated with any broad market or volatility risk index.
- A risk premium for selling volatility (tail risk), which is a 'beta' exposure that should not command 'alpha' fees (2-and-20).
- Operational risk gains resulting from a superior trade execution and settlement infrastructure rather than genuine market-based skill.
Sign up free to see the explanation and track your rank →
More FRM Part 2 Risk & Investment Management practice
- A hedge fund strategy captures frequent small gains but suff… — This risk profile is most
- A risk manager is evaluating an 'Illiquid Asset' (e.g., Priv… — Why is the 'Autocorrelatio
- An active manager has an Information Coefficient (IC) of 0.06 and a breadth (BR) of 400 in
- If the reported volatility is 10% and the first-order autocorrelation (φ) of returns is 0.
- In the context of Liquidity Risk, the 'Denominator Effect' refers to which of the followin
- If the manager effectively doubles the breadth (BR) of the strategy while maintaining the
- If simulations show the steady-state NAV per vintage averages 2.4 times the annual commitm
- According to factor theory, why does an asset that pays off during 'bad times' (such as a