Alternative Investments Chapters 78-84

A hedge fund with a 2 and 20 fee structure has a hard hurdle rate of 5%. If the incentive fee and management fee are calculated independently and the management fee is based on beginning-of-period asset values, an investor's return after fees over a period during which the gross value of the fund has increased 22% is closest to:

16.6%. The management fee is 2% of the beginning asset value, which reduces an investor's gross return by 2% to 22 − 2 = 20%. The incentive fee is 20% of the excess gross return over the hurdle rate, or 0.20(0.22 - 0.05) = 3.4%. The investor return net of fees is 22% − 2% − 3.4% = 16.6%.

Jem Capital is a hedge fund with $150 million of initial investment capital. The fund charges a 2% management fee based on assets under management at the end of the year and a 20% incentive fee. Incentive fees and management fees are calculated independently. In the first year, Jem Capital has a 25% return. What is an investor's after-fee return for the year?

17.5%. Gross value end of year: $150 million × 1.25 = $187.5 million Management fee: $187.5 million × 2% = $3.75 million Incentive fee: ($187.5 million - $150 million) × 20% = $7.5 million Total fees to Jem Capital: $11.25 million The after-fee return: [(187.5 - 11.25) / 150] - 1 = 17.5%.

A hedge fund has a return of 30% before fees in its first year. The fund has a management fee of 1.5% on end-of-year fund value and a 15% incentive fee, with an 8% hard hurdle rate on gains net of the management fee. The return after fees for an investor in this fund is closest to:

25.0%. Year-end gross value = 100 × 1.30 = 130 Management fee = 1.5% × 130 = 1.95 Gains net of management fee = 30 - 1.95 = 28.05 Hurdle gains = 8% × 100 = 8 Incentive fee = 15% × (30 - 1.95 - 8) = 3.0075 Total fees = 1.95 + 3.0075 = 4.9575 Ending value after fees = 130 - 4.9575 = 125.0425 Return after fees = 125.0425 / 100 - 1 = 25.0425%

Carr Funds is a hedge fund with $125 million of assets under management at the end of the prior year. The fund has a "1 and 10" fee structure. Incentive fees are calculated on gains net of management fees at the end of the year. In the current year, Carr Funds had a 5% gross return. An investor's after-fee return for the year is closest to:

3.6%. Gross value end of year: $125 million × 1.05 = $131.25 million Management fee: $131.25 million × 1% = $1.3125 million Incentive fee: ($131.25 - $125 - $1.3125) × 10% = $493,750 Total fees to Carr Funds = $1.3125 million + $493,750 = $1,806,250 The after-fee return: [($131.25 - $1.80625) / 125] - 1 = 3.56%.

For private equity investors, which of the following would be most likely to benefit the limited partners at the expense of the general partner?

A hard hurdle rate rather than a soft hurdle rate of the same amount.

Hedge funds use leverage to magnify which of the following?

Alpha.

For an investor in a private equity fund, the least advantageous of the following limited partnership terms is a(n):

American-style waterfall provision.

Which type of biases in a hedge fund index are most likely to overestimate performance?

Backfill bias and survivorship bias.

Which of the following is least accurate about commodity returns?

Because commodity prices tend to have negative correlation with inflation rates, holding commodities can act as a hedge of inflation risk.

What is another name for a performance fee paid by investors in alternative investment funds?

Carried interest.

Which alternative investment incentive fee feature is most likely to benefit the manager?

Catch-up clause.

Which distributed ledger technology element may include proof of work and proof of stake?

Consensus protocols.

Mainstream financial systems are hesitant to accept cryptocurrencies as a medium of exchange due to which of the following factors?

Cryptocurrencies not being considered legal tender in many countries.

Which type of cryptocurrency-related vehicle invests directly in cryptocurrencies?

Cryptocurrency coin trusts.

Which of the following is least likely to be a benefit of investing in commodities?

Current income.

Which private capital fund waterfall structure involves distributing profits as each investment is sold and subsequently shared according to the partnership agreement?

Deal-by-deal waterfall.

Which of the following statements is most accurate regarding centralized and decentralized cryptocurrency exchanges?

Decentralized exchanges are less susceptible to network attacks and security vulnerabilities.

Which of the following is least likely a unique risk of property development?

Default risk.

What type of private debt is least likely to have warrants?

Direct lending.

Which type of private capital fund is most likely to earn excess returns over its life if its vintage year took place during an economic contraction?

Distressed debt fund. Funds with vintage years during contractions are likely to earn higher rates of return if they specialize in distressed companies. Funds with vintage years during expansions are likely to earn higher rates of return if they specialize in early-stage companies.

Which of the following infrastructure projects is most likely to offer the highest expected return?

Equity investment in a new passenger rail line in a developing country.

Which of the following types of alternative investment is most likely to provide steady cash flows?

Farmland.

Which of the following real estate investment strategies is less risky than a core real estate strategy?

First mortgage debt.

Which of the following is best characterized as a direct investment in infrastructure?

First mortgage on a toll road.

Robert Aaron would like to start investing a relatively small amount of capital into commercial real estate, and diversification among these investments is important to him. Which investment method is Aaron most likely to use?

Fund investing.

Which of the following is least likely when net cost of carry for a commodity is negative?

Futures prices will be in contango.

Which of the following is most likely an advantage of direct real estate investment as compared to investing in a REIT?

Greater control.

Which type of infrastructure investment has the highest risk-return profile?

Greenfield.

What is an example of selection bias when creating a hedge fund index?

Inconsistent allocation of individual funds to a peer group.

At what stage in its lifecycle is a company most likely to have distressed debt?

Mature.

Which of these is an example of a social infrastructure asset?

Public hospitals.

Which of the following infrastructure investments provides the greatest degree of certainty about cash flows?

Secondary-stage investments.

In which stage of a firm's development is a venture capital fund most likely to make its initial investment?

Seed capital.

Which of the following is most likely an attribute of timberland and farmland?

The investment is relatively illiquid.

Which of the following statements about distributed ledger technology (DLT) is most accurate?

Tokenization can potentially streamline transactions involving high-value physical assets.

Which of the following types of private debt has the lowest level of risk?

Unitranche debt.

The convenience yield of a commodity is best described as:

a benefit that reduces the forward price.

The notice period for a hedge fund is best described as the period following:

a request for redemption of shares, within which the fund must fulfill the request.

An example of a digital form of investment in a nondigital asset is:

an asset-backed token.

A hedge fund that engages primarily in distressed debt investing and merger arbitrage is best described as using:

an event-driven strategy.

In a secondary sale, a private capital firm sells one of its portfolio companies to:

another private capital fund.

In contrast with traditional asset classes, digital assets most likely:

are not typically backed by underlying asset cash flows.

The main driver of cryptocurrency values is:

asset appreciation.

Under both the proof of work (PoW) and proof of stake (PoS) consensus protocols, it is most likely that participants who validate transactions will:

be rewarded with a new digital asset.

Reported alternative investment index returns are most likely biased upward by:

both survivorship bias and backfill bias.

SuperStarts Venture Capital Fund has a favorable performance record compared to other venture capital funds. This most likely suggests SuperStarts began investing its capital in a:

business cycle expansion.

A private equity fund has a "2 and 20" fee structure with the performance fee independent of management fees. The fund will sell a holding for a profit of 9%. The hurdle rate is specified as 8%. The provision that would result in an incentive fee of 1% is a:

catch-up provision.

Unitranche debt is best described as:

combining different classes of debt into a single loan.

Management fees for a private capital fund are determined as a percentage of:

committed capital.

Investors in an initial coin offering (ICO) typically receive:

cryptocurrency.

The type of investment most often used to gain exposure to commodity prices is a portfolio of:

derivative securities.

Compared to centralized exchanges, decentralized exchanges are more:

difficult to regulate.

Returns to investors in an alternative investment fund are most likely to be positive during its phase of capital:

distribution.

The most likely perceived benefit of alternative investments is:

diversification.

Smart contracts are most likely to be used for:

extending the value of a blockchain beyond a store of value.

An investor who wants to gain exposure to alternative investments but does not have the in-house expertise to perform due diligence on individual deals is most likely to engage in:

fund investing.

The inherent value of digital assets is least likely to be based on:

future cash flow.

Investments in infrastructure assets that will be constructed in the future are most accurately described as:

greenfield infrastructure investments.

A hedge fund that employs a fundamental growth strategy using equity securities is most likely to seek out shares of companies that are:

growing revenues and earnings rapidly.

Compared with alternative investments, traditional investments tend to:

have lower fees.

Social infrastructure assets most likely include:

health care facilities.

Compared to a traditional mutual fund, a hedge fund is more likely to feature:

higher fees.

If a commodity's convenience yield is close to zero, the futures market for that commodity is most likely:

in contango.

During steep market downturns, the correlation between REITs and market equity returns tends to:

increase.

When compared to traditional investments, alternative investments are characterized by:

less liquidity of assets held.

A hedge fund has a 2-and-20 fee structure with a soft hurdle rate of 5% and a high water mark. Incentive fees are calculated net of management fees. The fund's gross return is 15% in Year 1, −10% in Year 2, and 30% in Year 3. Incentive fees for Year 3 will be:

less than 20% of the increase in value in Year 3 after management fees. Because the fund lost value in Year 2 and has a high water mark, incentive fees for Year 3 will be 20% of only the portion of the Year 3 gain that exceeds the previous highest value.

Compared to traditional investments, alternative investments are most likely to be more:

leveraged.

An additional risk of direct investment in real estate, which is not typically a significant risk in a portfolio of traditional investments, is:

liquidity risk.

Compared to fund investing, direct investing most likely has:

lower fees.

Compared to regulated initial public offerings, initial coin offerings most likely have:

lower issuance costs.

The vintage year is the year in which a private equity fund:

makes its first investment.

In a 2-and-20 hedge fund fee structure, the "2" refers to a hedge fund's:

management fee.

Victrix is a hedge fund that has a 3-and-15 fee structure. Compared to hedge funds with 2-and-20 fee structures, Victrix charges higher:

management fees.

An investor who chooses a fund-of-funds as an alternative to a single hedge fund is most likely to benefit from:

manager expertise.

With regard to the role of digital assets as an investment class, it is most accurate to state that they:

may provide diversification benefits.

The proof of work (PoW) consensus protocol involves:

miners using computers to solve cryptographic problems.

Potential impacts of asset-backed tokens most likely include:

more liquidity for higher-priced assets.

The period of time within which a hedge fund must fulfill a redemption request is the:

notice period.

The performance of a hedge fund is most appropriately evaluated:

on a risk-adjusted return basis.

Greenfield investments are most likely to be characterized by:

opportunistic development.

Which statement about hedge funds is the most accurate? Hedge funds are:

privately held and available to qualified or accredited investors.

Cryptocurrency prices are least likely to be affected by:

projected cash flows.

An investor in a private investment in public equity (PIPE) transaction is most likely to:

receive either existing or newly issued common stock.

An institutional investor who wants to invest in a hedge fund that engages in convertible bond arbitrage would most appropriately select a:

relative value strategy fund.

The type of real estate index that most likely exhibits sample selection bias is:

repeat sales index.

An initial coin offering (ICO) is best described as a:

security token.

The formative stage of venture capital investing when capital is furnished for market research and product development is best characterized as the:

seed stage.

The stage at which venture capital financing is used to fund market research and product development is best characterized as the:

seed stage.

An equity hedge fund strategy that focuses primarily on exploiting overvalued securities is best described as a(n):

short bias strategy.

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

specialized funds.

When the benefit of holding a commodity exceeds the carrying cost:

the forward curve experiences backwardation.

To exit an investment in a portfolio company through a trade sale, a private equity firm sells:

the portfolio company to one of the portfolio company's competitors.

With respect to venture capital, the term "mezzanine-stage financing" is used to describe the financing:

to prepare for an initial public offering.

Ownership rights to physical assets on distributed ledger technology are represented by a:

token.

A government decides it will privatize vehicle registrations if the province's auto insurance companies can record and maintain ownership titles using distributed ledger technology. This application of distributed ledger technology is best characterized as:

tokenization.

The benefits of using distributed ledger technology (DLT) to validate transactions on a blockchain least likely include:

using high-performance computers for verifying transactions.

Risks of directly investing in large, well-established cryptocurrencies least likely include:

whales.