Alternative Investments I

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Question 1 of 17

1. Question
Categories of Alternative Investments

Which of the following are least likely a characteristic of alternative investments?
- Low liquidity
- High levels of transparency
- Limited historical return data
- Tightly regulated
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Question 2 of 17

2. Question
Categories of Alternative Investments

Caroline is a wealthy investor who is interested in adding alternative investments into her portfolio which comprises mainly stocks and bonds. Which of the following reasons given by her advisor is most likely incorrect?
- "Alternative investments have low correlations with your current portfolio. You will get diversification benefits if you add them into your portfolio."
- "Alternative investments have higher historical returns. This can increase the expected returns of your portfolio."
- "Alternative investments have lower standard deviations of returns historically. This reduces the risk to your portfolio."
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Question 3 of 17

3. Question
Categories of Alternative Investments

An analyst studied the returns on a hedge fund index, and found that 5 high performing funds were added to the index last year. If the 5 funds were not included, the 10-year return of the the index would have been 1.5% lower than what is reported.

What is this observation most likely an indication of?
- Backfill bias
- Survivorship bias
- Self-selection bias
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Question 4 of 17

4. Question
Hedge Fund Strategies

What does a limited partner mean in the context of hedge funds?
- The investor has limited rights to the assets managed by the hedge fund.
- The hedge fund is limited only selected investors.
- The investor's liability is limited to the amount of their investment in the company.
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Question 5 of 17

5. Question
Hedge Fund Strategies

Which of these is the least correct reason to invest through a fund of hedge funds (FOF)?
- Fees are lower than to invest directly into hedge funds
- Fund of hedge funds allow smaller investment sizes
- Some hedge funds are not open to investors who do not meet their criteria
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Question 6 of 17

6. Question
Hedge Fund Strategies

Karl has been a limited partner in a hedge fund for 18 months. He wishes to liquidate his position in the hedge fund, and instructs the general partner of the redemption. The hedge fund has a lockup period of 2 years, and a notice period of 90 days.

How long does Karl have to wait to receive his redemption proceeds?
- 90 days
- 6 months
- 2 years
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Question 7 of 17

7. Question
Hedge Fund Strategies

Match the following statements to the strategy that they best describe. (drag and drop the boxes)
Sort elements
- "Based on our outlook on the economic outlook, interest rates and monetary strength, we take long and short positions in various assets worldwide."
- "We take the long position of a firm's senior debt, and simultaneously short the same firm's junior/subordinated debt. If the firm performs poorly, we profit on the widening spread."
- "We use fundamental analysis to long the stocks of companies with growth potential."
- "We seek to exploit pricing differences by longing an undervalued security and shorting and overvalued related security to profit when the pricing discrepancy is resolved."
- "We buy enough shares of promising public listed companies such that we are able to influence the strategies of the companies to help them grow."
- "We use technical and fundamental analysis to long undervalued stocks and short overvalued stocks. The aggregate long and short positions are approximately equal such that our exposure to market risk is minimal."
- Macro strategy
- Distressed/Restructuring
- Fundamental growth
- Relative value strategy
- Activist shareholder
- Market neutral
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Question 8 of 17

8. Question
Hedge Fund Benefits and Fees

A hedge fund charges a typical “2 and 20” fee annually. The management fee is charged based on ending portfolio value, and the incentive fee is charged based on a soft hurdle rate of 5%, net of management fees. Given that the beginning portfolio value was $8 million and ending value was $10 million before fees, what are the fees to be charged for the year?
- Management fee: $200,000 Incentive fee: $360,000
- Management fee: $200,000 Incentive fee: $280,000
- Management fee: $160,000 Incentive fee: $280,000
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Question 9 of 17

9. Question
Hedge Fund Benefits and Fees

A hedge fund has a typical “2 and 20” fee structure with no hurdle rate. The portfolio value increased from $20M to $$26M within the year, and an after-fees high watermark of $22M. The incentive fee the general partner should receive for the year is closest to:
- $800,000
- $696,000
- $1,096,000
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Question 10 of 17

10. Question
Hedge Fund Benefits and Fees

A hedge fund investor finds that funds with better historical returns does not necessarily carry through the same performance in the future. What could be the most likely reason?
- The managers left and joined other hedge funds after they become successful
- Previously profitable strategies become less profitable as more funds pursue the same strategy
- Managers tend to take on more risks as they become successful
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Question 11 of 17

11. Question
Private Equity

A private equity fund intends to purchase a firm and work with the existing management to increase the value of the firm. What strategy is this closest to?
- Activist Shareholder
- Management Buyout
- Management Buy-in
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Question 12 of 17

12. Question
Private Equity

Sort the following categories of venture capital financing from the earliest to the latest stage of growth.
- Later Stage Financing
- Angel Investing
- Early Stage Financing
- Seed Stage Financing
- Mezzanine Stage Financing
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Question 13 of 17

13. Question
Private Equity

A PE firm wishes to obtain cash from one of its portfolio companies which is not ready for sale yet. Which is the most appropriate exit strategy to employ?
- Recapitalisation
- Secondary sale
- IPO
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Question 14 of 17

14. Question
Which of the following is not a similarity between PE funds and hedge fund?
- Both are typically structured as limited partnerships.
- Both assess management fees based on assets under management.
- Both typically use leverage as a tool to magnify gains.
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Question 15 of 17

15. Question
Private Equity

In 2010, the limited partners of a new PE fund committed $100 million to the fund, of which $20 million are invested in 2010. The fund has a “3 and 20” fee structure. What is the amount of management fees charged for 2010?
- $0.6 million
- $2.4 million
- $3.0 million
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Question 16 of 17

16. Question
Private Equity

In 2010, the limited partners of a new PE fund committed $100 million to the fund. By 2017, all the committed funds have been invested, and the fund has returned $40 million of the invested funds to the limited partners.

The fund has a “3 and 20” fee structure. What is the amount of management fees charged for 2017?
- $1.2 million
- $1.8 million
- $3.0 million
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Question 17 of 17

17. Question
Private Debt

Which of the following is least likely a characteristic of mezzanine financing?
- It has a senior claim on a firm's assets if the firm defaults
- It can include warrants, which gives the lender the right to purchase new stocks
- It can have a convertibility option to convert the debt into common stock
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Alternative Investments I

Alternative Investments I

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