UPSC Prelims Practice Questions — Hedge funds trim North America exposure amid trade tensions

Q1. In India, entities operating as hedge funds are registered and regulated exclusively as Category III Alternative Investment Funds under which one of the following?

  • A. SEBI (Alternative Investment Funds) Regulations, 2012
  • B. SEBI (Mutual Funds) Regulations, 1996
  • C. SEBI (Foreign Portfolio Investors) Regulations, 2019
  • D. SEBI (Collective Investment Schemes) Regulations, 1999

Q2. In the context of hedge fund compensation, the term 'two-and-twenty' most precisely refers to which one of the following?

  • A. An annual management fee of about 2% of assets under management plus a performance fee of 20% of profits
  • B. A requirement to hold at least 2% of the corpus in cash and 20% in government securities
  • C. A limit capping borrowing at 2 times capital and short positions at 20% of the portfolio
  • D. A structure needing a minimum of 2 anchor investors and 20 total limited partners

Q3. With reference to how hedge funds structurally differ from conventional mutual funds, consider the following statements: 1. Unlike most mutual funds, which are typically long-only, hedge funds routinely employ short selling and leverage in pursuit of absolute returns. 2. In India, hedge funds are registered as Category III AIFs with a minimum investor commitment of Rs 1 crore, far above the entry threshold applicable to retail mutual funds. 3. Category III AIFs in India may deploy leverage up to two times their net asset value, a facility not available to conventional mutual funds. Which of the statements given above is/are correct?

  1. Unlike most mutual funds, which are typically long-only, hedge funds routinely employ short selling and leverage in pursuit of absolute returns.
  2. In India, hedge funds are registered as Category III AIFs with a minimum investor commitment of Rs 1 crore, far above the entry threshold applicable to retail mutual funds.
  3. Category III AIFs in India may deploy leverage up to two times their net asset value, a facility not available to conventional mutual funds.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q4. With reference to the findings of the IMF Global Financial Stability Report (April 2025) on hedge funds and nonbank financial institutions, consider the following statements: 1. The market turmoil following the April 2025 tariff announcement exposed vulnerabilities from the elevated leverage of nonbank financial institutions. 2. Treasury selling by leveraged nonbank financial institutions in response to margin calls may have amplified market moves. 3. Greater interconnectedness between banks and nonbank financial institutions was found to intensify the transmission of shocks across the financial system. 4. The Report concluded that hedge fund leverage poses negligible systemic risk because it is fully insulated from the banking sector. Which of the statements given above is/are NOT correct?

  1. The market turmoil following the April 2025 tariff announcement exposed vulnerabilities from the elevated leverage of nonbank financial institutions.
  2. Treasury selling by leveraged nonbank financial institutions in response to margin calls may have amplified market moves.
  3. Greater interconnectedness between banks and nonbank financial institutions was found to intensify the transmission of shocks across the financial system.
  4. The Report concluded that hedge fund leverage poses negligible systemic risk because it is fully insulated from the banking sector.
  • A. 1 only
  • B. 2 and 3
  • C. 4 only
  • D. 1, 2, 3 and 4

Q5. According to the IMF Global Financial Stability Report (April 2025), hedge funds rely on banks — particularly global systemically important banks — for more than what share of their total funding?

  • A. More than 25 percent
  • B. More than 33 percent
  • C. More than 50 percent
  • D. More than 75 percent

Q6. Reports in 2025 noted a divergence in hedge fund positioning: even as they sold Indian equities, hedge funds were rotating money into a specific set of overseas markets seen as AI-rally or tariff-advantage beneficiaries. How many such beneficiary markets were specifically named in these reports?

  • A. Three
  • B. Four
  • C. Five
  • D. Seven

Q7. With reference to the 2025 rotation of hedge fund and portfolio capital away from North America, consider the following statements: 1. Through 2025, hedge funds were reported reducing exposure to North America-focused strategies while rotating capital toward Asian markets. 2. The WTO projected that North America would record the steepest regional decline in exports in 2025, with a forecast drop of about 12.6 percent. 3. Asia-focused hedge funds channelled their capital exclusively into Indian equities, which consequently recorded the largest foreign inflows of 2025. Which of the statements given above is/are correct?

  1. Through 2025, hedge funds were reported reducing exposure to North America-focused strategies while rotating capital toward Asian markets.
  2. The WTO projected that North America would record the steepest regional decline in exports in 2025, with a forecast drop of about 12.6 percent.
  3. Asia-focused hedge funds channelled their capital exclusively into Indian equities, which consequently recorded the largest foreign inflows of 2025.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q8. With reference to the United States' 2025 reciprocal tariff actions and related trade data, consider the following statements: 1. In April 2025 the US announced reciprocal tariffs on around 60 countries, including India. 2. A baseline additional ad valorem duty of 10 percent was applied on imports under the reciprocal tariff framework. 3. From May 2025 the US imposed a 25 percent safeguard-type tariff on imported passenger vehicles and certain auto parts. 4. Under WTO schedules the US maintains a simple average MFN tariff of 17 percent, higher than India's 3.3 percent. Which of the statements given above is/are NOT correct?

  1. In April 2025 the US announced reciprocal tariffs on around 60 countries, including India.
  2. A baseline additional ad valorem duty of 10 percent was applied on imports under the reciprocal tariff framework.
  3. From May 2025 the US imposed a 25 percent safeguard-type tariff on imported passenger vehicles and certain auto parts.
  4. Under WTO schedules the US maintains a simple average MFN tariff of 17 percent, higher than India's 3.3 percent.
  • A. 4 only
  • B. 1 and 2
  • C. 3 only
  • D. 2 and 4

Q9. In the OECD Economic Outlook (June 2025), among major economies which one was projected to see the sharpest single downgrade in GDP growth, falling from 2.8 percent in 2024 to 1.6 percent in 2025?

  • A. United States
  • B. China
  • C. Euro area
  • D. India

Q10. Managing exchange-rate volatility and deploying foreign exchange reserves to cushion the rupee against sustained foreign portfolio investment outflows is primarily the responsibility of which institution?

  • A. Reserve Bank of India (RBI)
  • B. Securities and Exchange Board of India (SEBI)
  • C. Ministry of Finance
  • D. NITI Aayog