Chartered Financial Analyst (CFA) Practice Exam Level 2

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What is a characteristic of hedge funds compared to traditional investments?

  1. Higher regulatory constraints

  2. Lower investment universe

  3. More aggressive exposure

  4. Less flexibility in trading

The correct answer is: More aggressive exposure

Hedge funds are known for their more aggressive exposure compared to traditional investments. This characteristic stems from their use of a wider array of investment strategies, which may include short selling, leverage, derivatives, and other complex financial instruments. These strategies often aim to maximize returns regardless of market conditions, allowing hedge funds to pursue higher risk-adjusted returns than traditional investment vehicles typically would. In contrast, traditional investment funds, like mutual funds, often have stricter regulations, more limited investment strategies, and lower risk tolerance, making them less aggressive in nature. This aggressive approach taken by hedge funds is a significant reason investors might choose them, particularly those looking for higher potential returns and are comfortable with the associated risks.

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