Quiz: Holdings Based Style Analysis

CFA Level III
#1

Why is Holdings Based Style Analysis not appropriate for Hedge Funds (6 points)?

#2

Cause they don’t tell you what’s in the black box.

#3

Two reasons I can think of: 1) There is a significant amount of information required to run this and hedge fund holdings are not transparent enough in order to conduct the analysis. 2) A holdings based style analysis should not be used for strategies with options and futures. Holdings based analysis is generally used for long-only equity strategies, although it can be employed in fixed-income to a degree.

#4

I thought that’s exactly what holdings based analysis did. Tell you about each holding and catch style drift faster than return based. Return based is the black box in the sense that it evaluates the whole portfolio vs. each holding. Am I way off here? Pimp, could it be due to the short/long positions and the possible net short positions?

#5

The “Hedge Funds being Black Box strategies” answer is correct. Give yourself 6 points.

#6

I would take this way. (1) Hedge fund changes their holdings very fast, not suitable for the Holding based analysis. (2) They do not rely on absolute holding. Like Market Neutral Hedge Funds may not be appropriate for Holding based analysis.

#7

Pass - you are correct about the reasons for using Returns-based and holdings based, but the lack of transparency in hedge fund holdings makes it too difficult to run holdings based with any high degree of accuracy. Holding’s based does help catch style drift more quickly then returns-based, but only if you have enough information to run the report.

#8

FastEd Wrote: ------------------------------------------------------- > Pass - you are correct about the reasons for using > Returns-based and holdings based, but the lack of > transparency in hedge fund holdings makes it too > difficult to run holdings based with any high > degree of accuracy. Holding’s based does help > catch style drift more quickly then returns-based, > but only if you have enough information to run the > report. Ed, thanks for this explanation. Good question Pimp.

#9

Becasue HF is not transparent.

Classical holdings-based analysis method doesn’t work.

  1. Valuation levels - doesn’t work
  2. Forecasted EPS growth rate - doesn’t work
  3. Earnings variability - doesn’t work
  4. Industry sector weightings - doesn’t work
#10

June06

Kneel in front of me

And now I crown you the King of Bump

#11

My honor.