SIE practice questionhardHedge Funds — Strategies
Which of the following strategies is commonly used by hedge funds but NOT typically available to mutual funds?
- ASignificant use of leverage, short selling, and derivatives to pursue absolute returns✓ Correct answer
- BBuying stocks in the S&P 500 index
- CInvesting in U.S. Treasury bonds
- DDollar-cost averaging into large-cap stocks
Explanation
Why A — Significant use of leverage, short selling, and derivatives to pursue absolute returns
Hedge funds can use aggressive strategies including substantial leverage, concentrated short selling, and complex derivatives — strategies that mutual funds face significant regulatory restrictions on. Hedge funds seek 'absolute returns' (positive returns in all market conditions), whereas mutual funds typically seek to outperform a benchmark. Hedge funds' lighter regulation allows greater flexibility but also greater risk.
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