Canadian Securities Course (CSC) Level 2 Practice Exam

The correct answer is that the type of funds that hold a portfolio of hedge funds is known as funds of hedge funds. This designation indicates that these funds invest primarily in a diversified portfolio of various hedge funds, allowing investors to gain exposure to a range of hedge fund strategies while still accessing the potential benefits of diversification and professional management.

Funds of hedge funds are specifically designed to mitigate risk while aiming for attractive returns, making them particularly appealing for investors looking to take advantage of alternative investment strategies without needing to invest directly in individual hedge funds. By pooling capital and investing across multiple hedge funds, these funds seek to enhance both stability and performance for their investors.

The other options do not fit this definition. Funds of open-end mutual funds would generally involve investing in various open-end mutual funds but not hedging strategies. Alternative mutual funds are typically structured like traditional mutual funds but focus on strategies that are more unconventional; they do not exclusively invest in hedge funds. Closed-end funds are a type of investment fund with a fixed number of shares that are traded on the stock exchange, which also does not specifically involve a portfolio of hedge funds.