SIE Understanding Products and Their Risks Question 85: Answer and Explanation

Question: 85

Which of the following statements is true regarding mutual funds but not of hedge funds?

• A. The fund manager must notify the investors prior to changing the investment strategy.
• B. The fund owes a fiduciary responsibility to the investors.
• C. The fund may have dozens of investors.
• D. The fund's risks and operations are described in a document.

Correct Answer: A

Explanation:

A: Choice A is correct because, while a mutual fund states its investment strategy and is bound to it, unless notice is given or the shareholders vote to approve, a hedge fund may typically change investment strategy without giving notice to investors. Choice B is incorrect because both owe a fiduciary responsibility to the investors. Choice C is incorrect because a mutual fund may have an unlimited number of shareholders. A hedge fund meeting the description of Section 3(c)(1) of the Investment Company Act of 1940 is limited to less than one hundred investors, and a hedge fund meeting the description of Section 3(c)(7) of the Investment Company Act of 1940 is limited to less than five hundred investors. Choice D is incorrect because a mutual fund provides a prospectus to an investor, an "offshore" hedge fund provides a document known as an "Offering Document" or a "Private Placement Memorandum (PPM)", and an "onshore" hedge fund typically organizes as a Limited Liability Corporation (LLC) or as a limited partnership and provides a "Partnership Agreement."