As a hedge fund portfolio manager, you focus on equity hedge strategies that seek to exploit pricing inefficiencies in the market. You are evaluating three distinct equity hedge strategies:: Strategy A: Long/short equity strategy that primarily invests in underpriced growth stocks while shorting overvalued value stocks. Strategy B: Market-neutral equity strategy that aims to eliminate market risk by maintaining equal dollar amounts in long and short positions across the portfolio. Strategy C: Activist investing strategy that takes significant stakes in companies to influence management decisions in order to unlock shareholder value. Which of the following statements is true regarding the specified equity hedge strategies and their expected outcomes in a bull market?

Exam

CFA Level 2

Section

Difficulty

Alternative Investments

Evaluating Equity Hedge Strategies in Bull Markets

Very Hard Hedge Fund Strategies Equity Hedge

As a hedge fund portfolio manager, you focus on equity hedge strategies that seek to exploit pricing inefficiencies in the market. You are evaluating three distinct equity hedge strategies::

Strategy A: Long/short equity strategy that primarily invests in underpriced growth stocks while shorting overvalued value stocks.
Strategy B: Market-neutral equity strategy that aims to eliminate market risk by maintaining equal dollar amounts in long and short positions across the portfolio.
Strategy C: Activist investing strategy that takes significant stakes in companies to influence management decisions in order to unlock shareholder value.

Which of the following statements is true regarding the specified equity hedge strategies and their expected outcomes in a bull market?

Strategy A is expected to outperform since it targets high-growth stocks likely to gain more during a bull market.

Strategy B will underperform because market-neutral strategies do not capitalize on long positions in a rising market.

Strategy C will generally outperform due to its influence on management decisions, leading to enhanced stock performance regardless of market conditions.

Hint

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