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SIE Hedge Funds

Hedge funds appear on the SIE as private, lightly regulated pooled vehicles sold to accredited and qualified investors. The tested points are the fee structure — "2 and 20" means a 2% management fee and 20% of profits — plus lock-ups, limited liquidity and the absence of 1940 Act protections.

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Understanding Products and Their Risks · 44%71 questions0% hard
44%of the exam is Understanding Products and Their Risks, the section this topic sits in.
71questions on this topic in the PrepScore bank.
32%are understand-level questions — the dominant cognitive demand here.
3are EXCEPT / NOT items, where the answer is the odd one out.
What the SIE asks

What you actually need to know

  • The "2 and 20" fee structure, and what each number refers to.
  • Accredited and qualified investor requirements.
  • Lock-up periods and redemption gates.
  • Why hedge funds are not registered investment companies.
How this topic behaves

What 71 questions on it look like

Not one question in this topic is rated hard, and 34% are easy. This is a topic to bank marks in, not to agonise over.

concept48%
scenario35%
comparison17%

Question-type mix across the 71 questions in this topic.

From the bank

Three real hedge funds questions

With the explanation — which is the part that teaches.

concept · medium · recall

A hedge fund advertises a "2 and 20" fee arrangement. What do these two numbers represent?

  1. AAn annual management fee of about 2% of assets plus a performance fee of about 20% of profitscorrect
  2. BA 2-year lock-up period and a 20% maximum annual redemption limit
  3. CA 2% front-end sales charge and a 20% contingent deferred sales charge
  4. DA 2% interest charge on margin and a 20% reserve held in cash
Why A is correct

The classic "2 and 20" hedge fund fee means roughly a 2% annual management fee on assets under management plus a 20% incentive (performance) fee on the fund's profits.

scenario · medium · apply

A hedge fund offering states that investors must meet a high minimum investment and eligibility standards such as accredited or institutional investor status. What concept is illustrated?

  1. ARetail mutual fund daily redemption
  2. BETF intraday exchange trading
  3. CFederal Reserve discount-window borrowing
  4. DLimited access to private pooled investmentscorrect
Why D is correct

Hedge funds commonly have limited investor access, including high minimums and eligibility standards such as accredited or institutional investor status.

comparison · medium · understand

Which comparison best identifies private equity at an introductory level?

  1. APrivate equity is intraday exchange trading of ETF shares; public equity is a hedge fund lockup
  2. BPrivate equity is a central-bank policy tool; public equity is a tax-advantaged education plan
  3. CPrivate equity is a daily redeemable mutual fund; public equity is an unsecured ETN
  4. DPrivate equity generally invests in private companies or buyouts with longer time horizons and limited liquiditycorrect
Why D is correct

Private equity generally involves investment in private companies or buyouts, often with longer time horizons and limited liquidity compared with public equity markets.

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FAQ

Hedge Funds questions

What does "2 and 20" mean?

A 2% annual management fee on assets, plus a 20% performance fee on profits.

Who can invest in a hedge fund?

Generally accredited investors, and often the higher qualified purchaser standard, because the fund relies on private-offering exemptions.

Are hedge funds regulated like mutual funds?

No. They are not registered investment companies, so the 1940 Act protections that apply to mutual funds do not apply to them.
Last reviewed 2026-08-28. Exam facts sourced to FINRA’s SIE exam page and the FINRA SIE content outline. Question counts describe the PrepScore bank, not the exam.
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