Chapter 10 (1Q)- Alternative Investments

Question 1

Hedge Funds

Answer 1

Hedge funds do not currently have to register with SEC

Hedge fund managers are the only ones who has to register as IA

Goal is to reduce volatility and risk for higher returns

Typically charge a management fee and performance fee

Most have a lock up provision and during are illiquid

Must be an institutional investor or accredited to invest

Question 2

Direct Participation Programs

Answer 2

Another class of alternative

Limited liability while taking part in all activities of a company tax wise (LPs)

Units of ownership are called interests

GPs- Assume responsibility of ownership and are active in the business. Assume unlimited liability

LPs- Not personally responsible for debt and no day to day responsibilities, must sign a subscription agreement

Total return takes into account tax deductions, cash distributions and capital gains

Considered illiquid
Can expose investors to higher risk of audit

Question 3

Investment Real Estate LP

Answer 3

Historically a hedge against inflation

Highly levered

Not correlated with stock market returns

But can be illiquid, not have tenants, be foreclosed due to losses

Question 4

Commodities

Answer 4

Most commonly traded commodity is crude oil

Second is often coffee

Hedges against inflation but more volatile

Commodity ETFs have same problem with vol

Lack income as well

Question 5

Unit Test 2 (First Attempt)

Answer 5

A
B
C
A
D
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B
A
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D
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A
A
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D -1 18 B
D
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C -1 28
C
C