Which of the following statements is least likely to be a unique risk associated with a hedge fund?
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A. B. C.C
Let's analyze each answer choice to determine which statement is least likely to be a unique risk associated with a hedge fund.
A. Cash needs arising from marking positions to market: Hedge funds typically use mark-to-market accounting, which means they adjust the value of their positions based on the current market prices. As a result, they may experience cash needs if the value of their positions decreases, leading to margin calls or the need to meet redemption requests. This is a unique risk associated with hedge funds because traditional equity funds generally do not employ as much leverage or complex trading strategies that can result in significant mark-to-market cash needs. Therefore, this statement is likely to be a unique risk associated with a hedge fund.
B. Unexpected absence of normal liquidity under extreme market conditions: Hedge funds often invest in less liquid assets such as private equity, real estate, or distressed securities. During extreme market conditions, when liquidity dries up and there is a lack of buyers in the market, it can be challenging for hedge funds to sell their illiquid assets or meet redemption requests from investors. This liquidity risk is a unique concern for hedge funds due to their investment strategies and asset class exposures. Therefore, this statement is also likely to be a unique risk associated with a hedge fund.
C. Higher volatility of returns as compared to traditional equity funds: Hedge funds often employ more aggressive investment strategies, including leveraging, short selling, and derivatives trading, which can amplify the volatility of their returns. Traditional equity funds typically follow long-only strategies and aim to achieve more stable returns. As a result, hedge funds are generally expected to exhibit higher volatility compared to traditional equity funds. However, while this statement is often associated with hedge funds, it is not necessarily a unique risk specific to them. Other investment vehicles or strategies can also generate high volatility. Therefore, this statement is least likely to be a unique risk associated with a hedge fund.
In conclusion, the statement least likely to be a unique risk associated with a hedge fund is C. Higher volatility of returns as compared to traditional equity funds.