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CFA Level I > 47: Alts > Flashcards

47: Alts Flashcards

1
Q

In a 2-and-20 hedge fund fee structure, the “2” refers to a hedge fund’s

A

2= management fee
20= incentive fee

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2
Q

Profits are distributed as each fund investment is sold and subsequently shared according to the partnership agreement

Profits distributed as fund exits each investment

A

deal-by-deal (American) waterfall structure for incentive fees

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3
Q

Refers to the way in which payments are allocated to GP and LPs as profits and losses are realized on deals

A

Waterfall

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4
Q

The limited partners receive all distributions until they have received 100% of their initial investment plus the hurdle rate

The GP does not earn an incentive fee until the LP have received their initial investment back

A

Whole-of-fund waterfall (European waterfall)

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5
Q

For hedge funds, management fees are calculated as:

A

a percentage of assets under management (AUM); net asset value of fund

Typically structured as a partnership

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6
Q

The typical trade used by a merger arbitrage fund is:

A

Short position of the acquirer
Long position in the firm being acquired;

Short the stock of the acquirer and buy the stock of the firm being acquired

Merger arbitrage, a type of Event driven hedge funds strategy;

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7
Q

Long based hedge fund strategy that involves long or short positions in common equity, preferred equity, or debt of a specific corporation

A

Event-driven hedge fund strategy:
* merger arbitrage
* distressed/restructuring
* special situations strategies

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8
Q

strategy involves seeking to profit from long and short positions in publicly traded equities and derivatives with equities as their underlying assets

A

Equity hedge;
not based on events such as restructuring or acquisition

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9
Q

a hedge fund charges an incentive fee on all profits, but only if the fund’s rate of return exceeds a stated benchmark.

A

Soft hurdle

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10
Q

hedge fund charges an incentive fee only on the portion of returns that exceed a stated benchmark

A

hard hurdle

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11
Q

A fund’s value must exceed its highest previous value (net of fees) before the fund may charge an incentive fee:

A

high water mark

Prevents GP from collecting incentive fees twice on investment gains

Prevents a GP from receiving incentive fees on incresas in investment value that do not increase its value above its previous high value

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12
Q

Convertible arbitrage is a strategy that involves buying a security and selling short a related security with the goal of profiting when a perceived pricing discrepancy between the two is resolved

A

Relative value hedge fund strategy

Also includes: asset backed fixed income, general fixed income, volatility, multi-strategy

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13
Q

The goal of adding hedge funds to a traditional portfolio is:

A
  • increase expected return
  • decrease variance; because returns on these investments are less than perfectly correlated with returns on traditional investments
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14
Q

Attempt to profit from short positions in equities they believe to be overvalued

A

Equity hedge fund strategies, with a short bias

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15
Q

strategy attempts to identify undervalued equities

A

Fundamental value- Equity hedge fund strategy

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16
Q

Investing in companies that are experiencing high growth and rapid earnings; and for which the fund managers anticipate significant capital appreciation

A

Fundamental growth- Equity hedge fund strategy

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17
Q

time after initial investment over which limited partners either:
* cannot request redemptions
* or incur significant fees or redemptions (soft)

A

Lockup period

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18
Q

The period following a redemption request, within which the fund must fulfill the request;
amount of time a fund has to fulfill a redemption request made after the lockup period has passed

A

Notice period

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19
Q

This stage of venture capital financing provides capital during the period prior to an initial public offering

A

mezzanine stage

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20
Q

This formative stage of venture capital investing, the capital is furnished for product development, marketing, and market research:

A

Seed stage

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21
Q

This formative stage of venture capital investing is when investment funds are used for:
* business plans
* assessing market potential
* product development
* marketing effort

A

Seed stage

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22
Q

This formative stage of venture capital financing refers to investments made to fund initial commercial production and sales

A

Early stage

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23
Q

The capital supplied, in this formative stage, is used to fund initial production & sales

A

Early stage

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24
Q

With deal by deal strucutre, requires the manager to return any periodic incentive fees to investors that would result in investors receiving less than 80% of the profits generated by portfolio investments as a whole

LPS may recover incentive fees if subsequent losses result in prior incentive fees exceeding agreed percentage of overall profits

A

clawback provision

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25
Q

in the formative stage, this funding is for the formation of the business

A

angel investing

26
Q

When the company issues debt to fund a dividend distribution to equity holders (the fund)

A private equity firm that wants to receive money from a portfolio company without giving up control of the portfolio company is most likely to engage in:

A

Recapitalization

27
Q

Private equity firm sells the portfolio company to a competitor or another strategic buyer

A

Trade sale; private equity firm is exiting an investment

28
Q

Value of having the physical commodity for use over the period of the futures contract

A

convenience yield

29
Q

If there is little or no convenience yield, the futures market for that commodity is:

A

in contango
Futures price > spot price

Convenience yield < Storage costs

30
Q

If the convenience yield is high, the futures market for that commodity is:

A

in backwardation
Futures price < spot price

Convenience yield > Storage costs

31
Q

Returns are smoother than those based on actual sales and have the lowest standard deviation of returns

A

appraisal index

Returns are based on property values

Because estimating values tends to introduce smoothing into returns data, appraisal index returns are likely to have lower standard deviations than index returns based on repeat sales or trading prices of REIT shares.

32
Q

Funds that invest in specific commodity sectors such as oil and gas or precious metals are best described as

A

specialized commodity funds

33
Q

Can provide a hedge against inflation:

A

Commodities & Natural Resources

34
Q

Including a previous year’s performance when adding a new fund, in an index

A

Backfill bias

35
Q

Survivorship bias and backfill bias cause an upward bias on:

A

Index Returns

36
Q

Infrequent valuation of portfolio companies cause a downward bias on:

A

correlations & standard deviation (risk)

37
Q

The Sharpe ratio is a less-than-ideal performance measure for alternative investments because:

A

Returns on alternatives are not normally distributed
(Sharpe ratio assumes normal distribution)

38
Q

The IRR calculation involves the assumption of two rates:

A

Rate for outgoing cash flows: WACC: required rate of return on investment
Rate for incoming cash flows: reinvestment rate

39
Q

The need to use a model for valuation arises when there is not reliable market values available on an asset because:

A

asset is so illiquid

40
Q

Focus on the left side of the return distribution curve, where losses occur

A

Downside risk measures
models used to measure: Sortino & VaR

Macro stategy fund

41
Q

Mostly involves leveraged buyouts of established, profitable, and cash generating companies

A

Private equity

Typically structured as a partnership

Returns are described in terms of the J-curve effect

42
Q

The management fee is typically based on committed capital, not invested capital:

A

private equity funds

vs hedge funds who’s feed are based on AUM

43
Q

Invests in other hedge funds, and incurs an additional layer of management & incentive fees:

A

Fund of Funds

Provides lower returns compared to directing investing in a hedge fund

44
Q

Institutional investors typically begin investing in alternative investments via:

Pool assets with other investors

A

Fund investing

Limited partnership agreement

lower minimuim investment amounts
less investor involvement
pay management & incentive fees
benefit from the expertise of the fund manager (general partner)

45
Q

A private equity firm that provides equity capital to a publicly traded company to finance the company’s restructuring, but does not take the company private:

A

Private Investment in Public Equity

46
Q

Examples of:

Social infrastructure:
Utility infrastructure:
Communications infrastructure:

A

Health care
Waste treatment plants
Broadcasting towers

47
Q

A hedge fund strategy that takes positions in shares of firms undergoing restructuring or acquisition is said to be pursuing:

A

Event driven strategy

48
Q

Private equity funds use which water fall structure?

A

Whole of fund (European)

The GP does not earn an incentive fee until the LP have received their initial investment back

49
Q

Making a direct investment in an asset that an investor also owns an interest in indirectly through a fund (invests through a fund):

Pool assets with other investors, but also invest directly alongside fund manager:

A

Co-investing

Reduced fees
Greater investor control
Requires greater involvement and expertise

50
Q

Investing through a limited partnership:

A

Investing in a group of assets (real estate or private companies)

Provides greater diversification compared to direct investing

51
Q

Gives investors more control over the selection of assets
Lower management fees

Investor purchases and manages the asset itself

A

Direct Investing

Control over decisions
Requires expertise
Less diversification
Avoids management fees charged in a limited partnership structure

52
Q

Rate of return that must be exceeded before incentive fees are paid to the general partner:

A

Hurdle rate

53
Q

Catch-up provisions favor:

A

General Partner

The limited partners get the first % hurdle rate gross return and the general partners get all returns above that rate to a maximum specified

54
Q

The use of derivatives is typically a feature of:

A

hedge funds

55
Q

Provides an investor with indirect equity exposure to real estate:

A

Real estate investment trusts (REITs)

56
Q

Infrastructure asset with growth opportunities and returns that are expected to be lower:

A

Brownfield Assets

Lower risk compared to Greenfield assets

57
Q

The Fund structure for fund investing includes:

A

General partners: fund managers
Limited partners: investors

58
Q

Portfolio managers invest in one of two ways to achieve returns:

A

Alts are generally actively managed; however a portfolio manager may use passive management to provide exposure to certain alts asset classes

Passively: focus on index or asset coverage (real estate, commodities, infrasture)

59
Q

Private equity strategy that includes:
* management buyouts
* management buy ins

A

Leveraged buyouts
* Management buyouts; Existing managers buyout the company
* Management buy-ins; replace exisiting managers with new managers

60
Q

Real estate investment that is characterized by illiquidity:

A

Commerical property

61
Q

Returns are only generated from price changes:

A

Commodities

(different from all other alternative investments)

62
Q

Due to biases, hedge fund returns & risk are:

A

Returns: overstated
Risk: understated

CFA Level I (45 decks)

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