Alternative Investments Topic test

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 fund. hedge fund. mutual fund.

A private equity manager is compensated through a management fee based on committed capital plus an incentive fee.

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. initial public offering. secondary sale.

A trade sale is the sale of a portfolio company to a strategic buyer, such as a company that is active in the same industry.

Compared with traditional investments, over longer periods, alternative investments are least likely to have: more efficiently priced assets. higher expected returns. better diversifying power.

Alternative investment strategies are more likely to include securities that trade in less liquid markets than securities that trade in relatively more liquid markets in which traditional, long-only investments trade.

Relative to traditional investments, alternative investments are most likely to be characterized by higher: liquidity. transparency. fees.

Alternative investments are often characterized by high fees.

If the level of broad inflation indices is largely determined by commodity prices, the average real yield on direct commodity investments is most likely: greater than zero. less than zero. equal to zero.

As the price increases of commodities are mirrored in higher price indices, the nominal return is equal to inflation and thus the real return is zero.

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 Later stage Seed stage

Early-stage financing is capital provided for companies moving toward operation but before commercial manufacturing and sales have occurred.

Commodity futures prices are most likely in backwardation when: interest rates are high. the convenience yield is high. storage costs are high.

In backwardation, futures prices are lower than spot prices-that is, the commodity forward curve is downward sloping. This scenario occurs when the convenience yield is high. Futures price ≈ Spot price (1 + r) + Storage costs - Convenience yield.

Which of the following characteristics of a target company is likely the least attractive for a leveraged buyout? Strong and sustainable cash flow Substantial amount of physical assets High leverage

Low leverage is an attractive feature of a target company in a leveraged buyout. This characteristic makes it easier for an acquirer to use debt to finance a large portion of the purchase price.

Which of the following hedge fund strategies is most likely categorized as an event-driven strategy? Fixed-Income Convertible Arbitrage Merger Arbitrage Quantitative Directional

Merger arbitrage is an event-driven strategy that involves buying the stock of the company being acquired and selling the stock of the acquiring company when the merger and acquisition (M&A) transaction is announced.

Management fees for a private equity fund are most likely based on the: * total committed capital minus capital returned from investments that are exited. * fair value of assets under management. * drawdown of committed capital plus any undistributed capital gains.

Private equity management fees are based on the full amount of committed capital, whether drawn down or not, minus capital that has been returned to investors from investments that have been exited.

One hedge fund strategy that involves simultaneously holding short and long positions in common stock is most likely: volatility. distressed/restructuring. quantitative directional.

Quantitative directional is an equity strategy that uses technical analysis to identify over- and underpriced securities, buy the underpriced ones, and short the overpriced ones.

Investors in alternative assets who seek liquidity are most likely to invest in: hedge funds. real estate investment trusts. private equity.

Real estate investment trusts are publicly traded and thus provide liquidity.

A real estate investor looking for equity exposure in the public market is most likely to invest in: shares of real estate investment trusts. collateralized mortgage obligations. real estate limited partnerships.

Shares in real estate investment trusts are publicly traded and represent an equity investment in real estate.

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. Year Before Fees After Fees 1 120 113.6 2 110 107.8 3 125 ? The total amount of fees earned by the hedge fund in Year 3 is closest to: $5.5 million. $5.9 million. $4.8 million.

The incentive fee is based on the performance relative to the previous high-water mark after fees. Management fee: 2% of $125 million = $2.5 million. Incentive fee: 20% of ($125 million - $113.6 million) = $2.28 million. In total: $2.5 million + $2.28 million = $4.78 million.

The real estate valuation method that uses a discounted cash flow model is best characterized as: a comparable sales approach. a cost approach. an income approach.

The income approach to real estate valuation values a property by using a discounted cash flow model.

investors will most likely have difficulty managing diversification across hedge funds if the funds: seek to keep their strategies private. make decisions via investment committees. fail to appoint chief risk officers.

The lack of transparency in positions and strategies makes it difficult for investors to effectively manage diversification across funds.

High Plains Capital is a hedge fund with a portfolio valued at $475,000,000 at the beginning of the year. One year later, the value of assets under management is $541,500,000. The hedge fund charges a 1.5% management fee based on the end-of-year portfolio value as well as a 10% incentive fee. If the incentive fee and management fee are calculated independently, the effective return for a hedge fund investor is closest to: 12.29%. 10.89%. 11.06%.

The management fee = $541,500,000 × 0.015 = $8,122,500. The incentive fee = ($541,500,000 - $475,000,000) × 0.10 = $6,650,000. Total fees = $14,772,500. Return = ($541,500,000 - $475,000,000 - $14,772,500)/$475,000,000 = 0.1089 or 10.89%.

The market approach to valuing portfolio companies in private equity firms is most likely based on: the value of assets minus the value of liabilities. present value. multiples.

The market approach to valuing portfolio companies uses multiples of different measures that are compared with similar companies.

Which of the following is least likely to reduce the likelihood of being defrauded by a dishonest money manager? * Strong and consistent reported investment performance * Independent verification of investment results * Third-party custody of assets under management

To prevent fraud, involvement of third parties in the reporting and asset management process is helpful. A strong and consistent reported investment performance that lacks outside verification may actually be a warning sign.

The value at risk of an alternative investment is best described as the: * probability of losing a fixed amount of money over a given time period. * minimum amount of loss expected over a given time period at a given probability level. * time period during which a fixed amount is lost at a given probability level.

Value at risk is defined as the minimum amount of loss expected over a given time period at a given probability level.