Hedge Fund Essentials > Core Topics > Flashcards

Core Topics Flashcards

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1
Q

What are financial markets?

A

Systems where participants buy, sell, lend, borrow, hedge, and transfer risk using financial instruments such as stocks, bonds, FX, and derivatives.

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2
Q

What are the 4 core functions of financial markets?

A

Capital formation, price discovery, liquidity, and risk transfer.

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3
Q

What is capital formation in financial markets?

A

The process by which companies and governments raise money from investors.

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4
Q

What is price discovery?

A

The process by which markets determine the value of an asset based on supply, demand, and information.

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5
Q

What is liquidity in financial markets?

A

The ability to buy or sell an asset quickly without causing a large price move.

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6
Q

What is risk transfer in financial markets?

A

The movement of financial risk from one participant to another, often using derivatives or insurance-like instruments.

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7
Q

What is the primary market?

A

The market where new securities are first issued, such as IPOs or bond issuance.

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8
Q

What is the secondary market?

A

The market where existing securities are traded between investors after issuance.

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9
Q

What is the difference between the primary and secondary markets?

A

Primary markets create and sell new securities; secondary markets trade securities that already exist.

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10
Q

What is the buy side?

A

Firms that invest capital to generate returns, such as hedge funds, asset managers, pensions, and insurers.

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11
Q

What is the sell side?

A

Firms that facilitate trading and provide services such as execution, market making, research, financing, and prime brokerage.

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12
Q

Where does a hedge fund sit in market structure?

A

On the buy side.

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13
Q

What does a hedge fund do in simple terms?

A

It raises capital, researches opportunities, takes positions across markets, manages risk, and tries to generate returns.

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14
Q

What is an asset manager?

A

A firm that manages money on behalf of clients, often in long-only or benchmarked portfolios.

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15
Q

What is a pension fund?

A

A large institutional investor that manages retirement assets for beneficiaries.

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16
Q

What is an insurer in financial markets?

A

An insurance company that invests premium income and manages long-term liabilities.

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17
Q

What is an investment bank in market structure terms?

A

A sell-side institution that provides execution, financing, research, underwriting, and market access.

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18
Q

What is a broker?

A

A firm that executes trades on behalf of clients.

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19
Q

What is a dealer?

A

A firm that buys and sells securities for its own account and provides liquidity to the market.

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20
Q

What is a market maker?

A

A participant that continuously quotes buy and sell prices and helps provide liquidity.

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21
Q

Why are market makers important?

A

They improve liquidity and help keep bid-ask spreads tighter.

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22
Q

What is an exchange?

A

A centralized venue where buyers and sellers trade under defined rules.

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23
Q

Give examples of exchanges.

A

NYSE, Nasdaq, London Stock Exchange, CME Group, ICE.

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24
Q

What does OTC mean?

A

Over-the-counter; trading done directly between counterparties or through dealers rather than on a centralized exchange.

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25
Which markets are commonly OTC?
Many bond, FX, and swap markets.
26
What is a dark pool or alternative trading system in simple terms?
A private trading venue used to match institutional orders away from public exchanges.
27
What is market infrastructure?
The systems and institutions that support execution, clearing, settlement, custody, and safekeeping of assets.
28
What is a clearinghouse or CCP?
A central counterparty that stands between buyer and seller to reduce counterparty risk.
29
What is settlement?
The final exchange of cash and securities after a trade is executed.
30
What is a custodian?
A firm that safekeeps assets and supports settlement, reporting, and corporate actions processing.
31
Why are custodians important to funds?
They help ensure assets are held safely and that post-trade operations run correctly.
32
What is a prime broker?
A large bank that provides hedge funds with services such as financing, custody, securities lending, execution support, and reporting.
33
Why is prime brokerage important for hedge funds?
It supports leverage, short selling, custody, and operational infrastructure.
34
What is securities lending?
The borrowing and lending of securities, often to enable short selling.
35
What is short selling?
Borrowing and selling a security in the hope of buying it back later at a lower price.
36
What is margin financing?
Borrowed capital used to increase the size of a position.
37
What is leverage?
Using borrowed money or derivatives to increase exposure beyond invested cash.
38
What is an equity?
An ownership stake in a company, usually in the form of stock.
39
What is fixed income?
Debt instruments such as government and corporate bonds that pay interest and return principal at maturity.
40
What is FX?
Foreign exchange; the market for buying and selling currencies.
41
What is a commodity?
A raw material or physical good such as oil, gold, natural gas, or wheat that can be traded financially.
42
What is a derivative?
A contract whose value is based on an underlying asset, rate, index, or event.
43
What are the major asset classes?
Equities, fixed income, FX, commodities, and derivatives.
44
What is a stock in simple terms?
A security representing ownership in a company.
45
What is a bond in simple terms?
A loan from an investor to a government or company.
46
What is a future?
A standardized contract to buy or sell an asset at a future date, usually traded on an exchange.
47
What is an option?
A contract that gives the right, but not the obligation, to buy or sell an asset at a set price before or at expiry.
48
What is a forward?
A customized OTC contract to buy or sell an asset at a future date.
49
What is a swap?
A contract in which two parties exchange cash flows, such as fixed versus floating interest payments.
50
Why do investors use derivatives?
For hedging, leverage, synthetic exposure, or expressing views more efficiently than cash instruments.
51
What is the trade lifecycle?
The end-to-end process from pre-trade decision-making through execution, clearing, settlement, and post-trade processing.
52
What are the main stages of the trade lifecycle?
Pre-trade, order creation, execution, clearing, settlement, and post-trade servicing.
53
What happens in pre-trade?
Market data analysis, research, signal generation, portfolio construction, and risk checks before an order is placed.
54
What is order execution?
The process of sending and matching a trade in the market.
55
What is clearing?
The process of validating, netting, and managing the obligations created by a trade.
56
What is the difference between execution, clearing, and settlement?
Execution is when the trade is matched, clearing is when obligations are validated and managed, and settlement is when cash and securities actually move.
57
What are corporate actions?
Events such as dividends, stock splits, mergers, coupon payments, and spin-offs that affect securities and positions.
58
Why are corporate actions important for data platforms?
They affect pricing history, positions, PnL, reference data, and reconciliation logic.
59
What is market data?
Dynamic data such as prices, quotes, trades, volumes, and order book updates.
60
What is reference data?
Relatively static instrument metadata such as ticker, ISIN, currency, exchange, lot size, and calendars.
61
Why is reference data important in finance?
It allows systems to identify instruments correctly and align data across vendors, trading, risk, and operations.
62
What is one strong summary of a hedge fund data platform?
A hedge fund data platform supports market data ingestion, research datasets, model workflows, execution analytics, risk, PnL, and post-trade controls.
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