Hedge fund - evaluation

[FrankCFA]

When evaluating the performance of a hedge fund that uses leverage, the convention is to:
A) use an optimization model to determine the weights on the book and debt values.
B) not attempt to evaluate the fund because the existence of leverage makes such an assessment impossible.
C) treat an asset as if it were fully paid to effectively “look through” the leverage.

 

[FrankCFA]

I guess A as well, but it’s not the answer.

 

[Galli]

C?

 

[FrankCFA]

Correct, it’s C!
Kaplan rationale:
The conventions for dealing with leverage is to treat an asset as if it were fully paid to effectively “look through” the leverage. When derivatives are included, the same principle of deleveraging is applied.