Alternative Investments

Categories of Alternative Investments

- Hedge funds - Private equity - Real estate - Commodities - Other (e.g., collectibles, intangibles)

When conducting due diligence on a vehicle for alternative investments, which of the following observations would most likely be positive for a potential investor?

Auditing and reporting to investors are performed by reliable third parties. Use of quality third-party service providers by an investment vehicle is a positive sign for potential investors. Manager and investor interests are more likely to be aligned if the general partner invests alongside the limited partners. If a single investor represents a large portion of assets under management, and that investor chooses to withdraw, the manager may be forced to liquidate assets at unfavorable prices.

The mezzanine financing portion of a leveraged buyout (LBO) is most likely to

B) be convertible to equity or include warrants. In the context of an LBO, mezzanine financing refers to debt that carries warrants or equity conversion features. This debt is typically subordinated to other bonds that are issued to finance the LBO. Committed capital is the investment of limited partners in a private equity fund and does not include debt that the fund issues to finance a particular LBO

Alternative Investments

Less liquidity of assets held. More specialization by investment managers. Less regulation and transparency. More problematic and less available historical return and volatility data. Different legal issues and tax treatments. Relatively low correlations with returns of traditional investments. High fees. Restrictions on redemptions. Relatively more concentrated portfolios.

A hedge fund uses derivative positions to take a long position in the Japanese yen and a short position in the euro. The classification of this hedge fund is most likely:

a macro strategy fund. Macro strategy funds invest based on expected shifts of global economies, primarily in currency and interest rate derivatives. Quantitative directional funds take long and short positions in equities based on technical analysis. Event-driven funds seek to profit from investment strategies based on specific corporate events and one-time transactions.

Brownfield and greenfield investments

brownfield investments and investments in infrastructure assets that are to be constructed are referred to as greenfield investments

Public-private partnerships are most likely to be a vehicle for investing in:

greenfield infrastructure.

Over time, compared to traditional stock and bond investments, the commodities asset class has exhibited

lower returns and higher price volatility. Returns on commodities over time have been lower than returns on global stocks or bonds, and price volatility has been higher.

A characteristic of alternative investments that distinguishes them from traditional investments is that:

redemptions are more restricted. Greater restrictions on investor redemptions are a characteristic of alternative investments. Alternative investments are less regulated than traditional investments and managers tend to hold more concentrated portfolios.

Compared to its net asset value (NAV) calculated in accordance with accounting standards, a hedge fund's trading NAV:

will be lower because of adjustments for illiquid positions. If a fund calculates a trading NAV, it will adjust market prices downward for securities in which it holds positions that are large relative to trading volume or total value outstanding and thus are less liquid.