Series 7 practice questionhardAlternative Investments — Hedge Funds
A hedge fund using a long/short equity strategy buys $10 million in undervalued stocks and shorts $8 million in overvalued stocks. This fund has a net market exposure of:
- A$2 million long (net long)✓ Correct answer
- B$18 million (gross exposure)
- C$10 million long
- D$8 million short
Explanation
Why A — $2 million long (net long)
Net market exposure is calculated as long positions minus short positions: $10M - $8M = $2M net long. This means the fund has a slight bullish bias but is largely hedged. The gross exposure is $18M ($10M + $8M), representing the total capital at risk. A market-neutral fund would aim for net exposure near zero by having equal long and short positions.
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