Alternative Investments

At the first of the year, an investor decides to invest $1.5 million in a hedge fund with an incentive fee of 15% and a hard hurdle rate of 4%. At the end of the year, the fund has a return of 23.3%. The incentive fee payment that the general partner of the fund earned based on this client's investment at the end of the year is closest to?

(Return-hurdle*beginning)*incentive %

A hedge fund with an initial value of $100 million has a management fee of 2% and an incentive fee of 20%. Management and incentive fees are calculated independently using end-of-period valuation. The value must reach the previous high-water mark before incentive fees are paid. The table below provides end-of-period fund values over the next three years. 1 120 113.6 2 110 107.8 3 125 ?

125*.02= 2.5 (125-113.6)*.2 = 2.28 = 4.8

Assume management fees are calculated using end-of-period valuation. The investor's net return given this fee structure is closest to: Initial investment 100mm mgmt fee 1% return 12% Incentive fee 10%

First take: initial investment * (1+r) Then 112mm*.01 = 1.12mm 12mm-1.12= 10.88*.1= 1.088 So then 112-1.12-1.088= 109.792 9.72%

hedge fund limited partnership agreement describes the general partner's total fees for each year as follows: The general partner will measure the fair value of the fund's assets at the beginning of the year (net of fees from the previous year) and the fair value of the fund's assets at the end of the year. The general partner will receive 15% of any increase in fair value in excess of the 1-year US Treasury yield at the beginning of the year. This fee structure most likely includes a:

Hard hurdle rate

Compared to traditional investments, alternative investments least likely demonstrate which of the following characteristics?

High degree of regulation. They do not have very much regulation.

With regard to venture capital, which of the following statements is most likely true regarding venture capital?

Investors want a higher return than they would want with publicly traded equity

The majority of private equity activity involves:

Leveraged buyouts

Illiquidity is most likely a major concern when investing in:

Private Equity

A real estate investor looking for equity exposure in the public market is most likely to invest in:

REIT

Which attribute would a private equity firm most likely desire when deciding if a company is particularly attractive as a leveraged buyout target?

Strong cash flows

Statement of historical record of alternative investments

The exclusion of returns of funds that have been liquidated leads to an upward bias in index performance. This is called the survivorship bias.

Hedge funds are least likely to have restrictions concerning:

The use of derivatives

A private equity firm sells a portfolio company to a buyer that is active in the same industry as the portfolio company. This transaction is best described as a(n):

Trade sale

An investor who has positions in multiple long-short equity hedge funds and is concerned about whether these positions are sufficiently diversified will mostly likely be concerned about the lack of:

Transparency in these reported positions

Which of the following is most likely a private equity strategy?

Venture Capital

Alternative investments that rely on estimates rather than observable market prices for valuation purposes are most likely to report:

Volatility of returns that is understated

With regard to commodities, it is most likely true that:

exposure most commonly achieved through commodity derivatives

Relative to traditional investments, alternative investments are most likely to be characterized by higher:

fees

A manager is compensated with a management fee based on committed capital plus an incentive fee based on fund performance. This scenario best describes the fee structure of a:

private equity

An investor seeking an indirect debt investment in real estate will:

purchase a mortgage backed security

One hedge fund strategy that involves simultaneously holding short and long positions in common stock is most likely:

quantitative directional

Investors will most likely have difficulty managing diversification across hedge funds if the funds:

seek to keep their strategies private.

The three main sources of return for commodities futures contracts most likely are:

spot price return, roll yield, collateral yield

A most likely reason for investors to include commodity derivatives in their investment portfolios is:

the tendency for commodity prices to be positively correlated with inflation. commodity-related stocks' positive correlation with the overall equity market.

Compared with long-only investments in stocks and bonds, alternative investments are most likely characterized by less:

transparency

High-water marks are typically used when calculating the incentive fee on hedge funds. They are most likely used by clients to:

avoid paying twice for the same performance

Seed stage

capital for business idea

Categories of alternative investments would least likely be described by

cash and other liquid investments

Which of the following least likely describes an advantage of investing in hedge funds through a fund of funds? A fund of funds may provide investors with:

lower fees because of economies of scale.

An argument for investing in commodities is that they:

may provide a hedge against inflation

The value at risk of an alternative investment is best described as the:

minimum amount of loss expected over a given time period at a given probability level.

The market approach to valuing portfolio companies in private equity firms is most likely based on:

multiples

Spot Price > Futures Price

Backwardation

Capital provided for companies moving toward operation but before commercial manufacturing and sales have occurred best describes which stage in venture capital investing?

early stage

If the level of broad inflation indexes is largely determined by commodity prices, the average real yield on direct commodity investments is most likely:

equal to zero

Which of the following characteristics of a target company is likely the least attractive for a leveraged buyout?

high leverage

A disadvantage of a fund of hedge funds as compared to a large multi-strategy fund is:

higher management fees

Compared with other investment asset classes, an investment in real estate is least likely to be characterized by:

homogeneity

A least likely reason for investors to include commodity derivatives in their investment portfolios is:

it eliminates the need to understand the physical supply chain and general supply-demand dynamics of a commodity.

Futures Price > Spot Price

Contango

If the price of a commodity futures contract is below the spot price, it is most likely that the:

Convenience higher than storage

Commodity futures prices are most likely in backwardation when:

Convenience yield is high

Based on the historical record, adding alternative investments to a traditional investment portfolio consisting of publicly traded debt and equity will most likely decrease the portfolio's:

liquidity

In commodity futures market pricing, when the convenience yield is higher than the cost of carry, the roll yield is positive for:

long positions

later-stage financing

after commercial manufacturing and sales have begun but before any initial public offering.

Contango when

Futures are greater than spot

An alternative investments fund that uses leverage and takes long and short positions in securities is most likely a:

Hedge fund

Q. A private equity limited partner would least likely experience which of the following?

Short time lags between investments in and exits from portfolio companies. There would actually be LONG time lags

A characteristic that makes a target company attractive for a leveraged buyout transaction most likely is:

Strong cash flow