CFAI Mock AM Essay 2016 Q3-C

Can someone explain how Octans Market-Neutral strategy (long and short to neutralize beta) does not violate Nielsen’s requirement of limiting derivatives to long-only and maintains his beta exposure?


Hi I have the same question. Would you change the title a little bit so that people knows it is for 2016 AM Essay?

  • Would like to know the whole process of how Octans achieve the goal.

I know the market neutral concept, which allows no beta, but that involves long/short futures right? The reading says long-only future.

Yeah - I was working on it with a buddy of mine and while I landed on the “right” answer with Octans as its benchmark is the risk-free, it violates his prohibition of using short futures. The CFAI answer was no help… Glad we’re not the only ones who got confused!

Did you guys figure out?

I took it as Nielson himself is not permitted to go short, but the managers he selects are not held to that constraint. Bit tricky, but Octans is clearly the best answer.

You are right man! Now I got it. That’s where everyone of us got confused.

Nielsen meant to construct this portion of the portfolio in two steps:

  1. Replacing existing emerging market equity manager.

  2. Implement an equitization strategy

Octans will construct a market neutral portfolio which has 0 beta and earn RF+ alpha.

Then, to remain exposure to emerging market beta Nielsen bought futures (long only)

So Nielsen did not borrow cash, Nielsen did not short anything, but Octans may.

Perfect. Yet, if we would have time for such brainstorming on real exam for similar tricky questions.

AH! Thanks for the brain wrinkle - I agree… overthinking during the test will definitely be a time-suck. Good luck!