Series 7 Exam Question 401: Answer and Explanation

Question: 401

One of your wealthier clients is interested in purchasing a fund. If liquidity is high on their list of investment objectives, which of the following would be the least suitable recommendation?

• A. ETFs
• B. Inverse ETFs
• C. Hedge funds
• D. Money market funds

Correct Answer: C

Explanation:

C. ETFs (exchange traded funds) and inverse ETFs are easily tradable and money market funds are easily redeemable, so they all have a high degree of liquidity. Hedge funds are the least liquid because they are unregulated and require a minimum holding period (lock-up provision) before investors can make withdrawals. Hedge funds are speculative and employ strategies unavailable to regulated investment companies. Hedge funds may purchase securities on margin, sell securities short, purchase or sell options, and so on.