CFA Exam Alternatives

A hedge fund has a 2-and-20 fee structure, based on beginning-of-period assets, with a soft hurdle rate of 5%. Incentive fees are calculated before management fees. An endowment invests $60.0 million in the hedge fund. The value of the endowment's investment, before fees, decreases to $56.2 million after one year and increases to $58.0 million the next year. In the second year the endowment will be charged management and incentive fees closest to: A)$1.15 million. B)$1.70 million. C)$1.10 million.

1.70 million

A Canadian hedge fund has a value of C$100 million at the beginning of the year. The fund charges a 2% management fee based on assets under management at the beginning of the year and a 20% incentive fee with a 10% hard hurdle rate. Incentive fees are calculated net of management fees. The value at the end of the year before fees is C$112 million. The net return to investors is closest to: A)8%. B)9%. C)10%.

10%

A British hedge fund has a value of £100 million at the beginning of the year. The fund charges a 2% management fee based on assets under management at the end of the year and a 20% incentive fee with a soft hurdle rate of LIBOR + 2.5%. Incentive fees are calculated net of management fees. If the relevant LIBOR rate is 2.5% and the fund's value at the end of the year before fees is £120 million, the net return to investors is closest to: A)16.5%. B)17.6%. C)14.1%.

14.1%

An investor made an investment in a hedge fund at the beginning of the year, when the NAV after fees was €80 million. The NAV after fees for Year 1 was €75 million. For Year 2, the end-of-year value before fees is €90 million. The fund has a 2 and 20 fee structure. Management fees are paid independently of incentive fees and are calculated on end-of-year values. Incentive fees are calculated using a high water mark and a soft hurdle rate of 2%. Total fees paid for Year 2 are: A)€5.8 million. B)€4.4 million. C)€3.8 million.

3.8 million

Springfield Fund of Funds invests in two hedge funds, DXS and REF funds. Springfield initially invested $50.0 million in DXS and $100.0 million in REF. After one year, DXS and REF were valued at $55.5 million and $104.5 million, respectively, net of both hedge fund management fees and incentive fees. Springfield Fund of Funds charges 1.0% management fee based on assets under management at the beginning of the year and a 10.0% incentive fee independent of management fees. The annual net return for Springfield Fund of Funds is closest to: A)5.5%. B)5.0%. C)6.0%.

5.0%

A Hong Kong hedge fund was valued at HK$400 million at the end of last year. At year's end the value before fees was HK$480 million. The fund charges 2 and 20. Management fees are calculated on end-of-year values. Incentive fees are independent of management fees and calculated using no hurdle rate. The previous year the fund's net return was 2.5%. The annualized return for the last two years is closest to: A)7.9%. B)13.6%. C)8.1%.

7.9%

When conducting due diligence on a vehicle for alternative investments, which of the following observations would most likely be positive for a potential investor? A)A well-known and highly regarded investor holds shares that represent 20% of the vehicle's assets under management. B)Auditing and reporting to investors are performed by reliable third parties. C)The general partner is prohibited from commingling his own funds with the limited partners' funds.

Auditing and reporting to investors are performed by reliable third parties

Which of the following is least likely an important element of risk management for alternative investment funds? A)Obtaining independent valuations of fund positions. B)Designating a risk management officer who also works as part of the investment team. C)Setting leverage limits.

Designating a risk management officer who also works as part of the investment team.

Which of the following is least likely a type of hedge fund strategy? A)Event-driven. B)Exchange-traded. C)Market-neutral.

Exchange-traded

Under which approach to valuing real estate properties is an analyst most likely to estimate a capitalization rate? A)Comparable sales approach. B)Income approach. C)Cost approach.

Income approach

The risk measure for alternative investments that is least likely to be affected by tendency of returns to be leptokurtic is: A)standard deviation. B)the Sortino ratio. C)coefficient of variation.

Sortino ratio

Which of the following risk measures is based on downside deviation rather than standard deviation? A)Value at risk. B)Sortino ratio. C)Roy's safety-first criterion.

Sortino ratio

Questions 107 through 113 relate to Alternative Investments. (10.5 minutes) For the valuation of real estate investment trusts (REITs), the asset-based approach estimates value by: A)subtracting total liabilities from the total value of the real estate assets and dividing by the number of shares outstanding. B)subtracting recurring capital expenditures from funds from operations. C)adding depreciation, subtracting gains from property sales, and adding losses on property sales.

Subtracting total liabilities from the total value of the real estate assets and dividing by the number of shares outstanding

Which of the following statements is least likely a risk management consideration for alternative investments? A)Alternative investment returns should reflect a premium to compensate investors for a lack of liquidity. B)Historical returns and standard deviations may not reflect future returns and volatility for alternative investments. C)The standard deviation of alternative investment returns may be misleading because returns distributions tend to be positively skewed.

The standard deviation of alternative investment returns may be misleading because returns distributions tend to be positively skewed

Alternative investments most likely have which of the following characteristics compared to traditional investments? A)Unique legal structures and tax treatments. B)Higher levels of regulation and transparency. C)Lower leverage and higher liquidity.

Unique legal structures and tax treatments

Return and risk data on alternative investments may be affected by backfill bias if: A)a firm's historical returns are included when it is added to an index. B)data only include currently existing firms. C)the incorrect distribution is used to model volatility.

a firm's historical returns are included when it is added to an index

The notice period for a hedge fund is best described as the period following: A)the opening of the fund to investors, before the fund is closed to new investors. B)a request for redemption of shares, within which the fund must fulfill the request. C)an investment in the fund, during which the investor is not permitted to redeem shares.

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

When valuing real estate investment trusts (REITs), funds from operations is calculated by: A)adding depreciation to net income. B)subtracting depreciation from operating income. C)subtracting recurring capital expenditure from net income.

adding depreciation to net income

Josh Lacy, CFA, is analyzing a portfolio company held by his private equity firm to estimate its value in liquidation. Lacy should most appropriately use: A)an asset-based approach. B)a comparables-based approach. C)a discounted cash flow-based approach.

an asset-based approach

For a given set of underlying real estate properties, the type of real estate index that is most likely to have the lowest standard deviation is a(n): A)repeat sales index. B)appraisal index. C)REIT trading price index.

appraisal index

The mezzanine financing portion of a leveraged buyout (LBO) is most likely to: A)represent committed capital. B)have seniority over other bonds issued to finance the LBO. C)be convertible to equity or include warrants.

be convertible to equity or include warrants

Real estate and private equity most likely share which of the following characteristics? A)Biases in historical returns on indexes. B)Low management fees. C)Commonly traded on an exchange.

biases in historical returns on indexes

A portfolio manager who adds hedge funds to a portfolio of traditional securities is most likely seeking to: A)decrease portfolio variance only. B)both increase expected returns and decrease portfolio variance. C)increase expected returns only.

both increase expected returns and decrease portfolio variance

Which of the following best describes a benefit from investing in commodities? Commodities: A)can serve as a hedge against inflation. B)have a strong positive correlation with stock and bond prices. C)benefit from markets oscillating between contango and backwardation.

can serve as a hedge against inflation

An investment in commodities will most likely provide returns from: A)cash flows from the assets. B)the yield on collateral deposits. C)changes in commodity spot prices.

changes in commodity spot prices

A private equity provision that requires managers to return any periodic incentive fees resulting in investors receiving less than 80% of profits is a: A)high water mark. B)drawdown. C)clawback.

clawback

The component of the return on a futures position that results from interest earned on U.S. Treasury bills deposited to establish the position is called the: A)current yield. B)roll yield. C)collateral yield.

collateral yield

An example of a relative value hedge fund strategy is: A)merger arbitrage. B)market neutral. C)convertible arbitrage.

convertible arbitrage

Relatively infrequent valuations of private equity portfolio companies most likely cause: A)average fund returns to be biased upward. B)standard deviations of fund returns to be biased upward. C)correlations of fund returns with equity returns to be biased downward.

correlations of fund returns with equity returns to be biased downward

A portfolio manager who adds commodities to a portfolio of traditional investments is most likely seeking to: A)increase expected returns only. B)decrease portfolio variance only. C)both increase expected returns and decrease portfolio variance.

decrease portfolio variance only

With respect to risk management for alternative investments, counterparty and liquidity risk are introduced as additional considerations by the use of: A)lock-up periods. B)foreign currencies. C)derivatives.

derivatives

Supplying capital to companies that are just moving into operation, but do not as yet have a product or service available to sell, is a description that best relates to which of the following stages of venture capital investing? A)Early stage. B)Angel investing stage. C)Mezzanine stage.

early stage

A hedge fund strategy that takes positions in shares of firms undergoing restructuring or acquisition is an: A)macro strategy. B)event driven strategy. C)equity hedge strategy.

event driven strategy

Adjusted funds from operations (AFFO) is best described as an estimate of a real estate investment trust's: A)free cash flow. B)operating cash flow. C)net operating income.

free cash flow

Investments in infrastructure assets that will be constructed in the future are most accurately described as: A)brownfield infrastructure investments. B)greenfield infrastructure investments. C)openfield infrastructure investments.

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: A)growing revenues and earnings rapidly. B)either undervalued or overvalued. C)undervalued only.

growing revenues and earnings rapidly

Social infrastructure assets most likely include: A)broadcasting towers. B)waste treatment plants. C)health care facilities.

health care facilities

Bulldog Fund is a hedge fund with a value of £100 million at the beginning of the year. Bulldog Fund charges 1.5% management fee based on assets under management at the end of the year and a 25% incentive fee with no hurdle rate. Incentive fees are calculated independent of management fees. The fund's value at the end of year before fees is £120 million. Compared to a 2 and 20 fee structure, Bulldog Fund's total fees for the year are: A)higher. B)lower. C)the same.

higher

Compared to a traditional mutual fund, a hedge fund is more likely to feature: A)lower leverage. B)higher fees. C)higher liquidity.

higher fees

If a commodity's convenience yield is close to zero, the futures market for that commodity is most likely: A)in contango. B)in backwardation. C)at fair value.

in contango

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: A)less than 20% of the increase in value in Year 3 after management fees. B)equal to 20% of the increase in value in Year 3 after management fees. C)greater than 20% of the increase in value in Year 3 after management fees.

less than 20% of the increase in value in Year 3 after management fees

Compared to traditional investments, alternative investments are most likely to be more: A)leveraged. B)liquid. C)transparent.

leveraged

An additional risk of direct investment in real estate, which is not typically a significant risk in a portfolio of traditional investments, is: A)liquidity risk. B)market risk. C)counterparty risk.

liquidity risk

In a 2-and-20 hedge fund fee structure, the "2" refers to a hedge fund's A)management fee. B)incentive fee. C)redemption fee.

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: A)management fees. B)load fees. C)incentive fees.

management fees

Kettering Incorporated is a successful manufacturer of technology hardware. Kettering is seeking capital to finance additional growth that will position the company for an initial public offering. This stage of financing is most accurately described as: A)mezzanine-stage financing. B)angel investing. C)early-stage financing.

mezzanine-stage financing

Which of the following will result from futures prices for a particular commodity being in contango? A)Negative collateral yield. B)Negative roll yield. C)Positive current yield.

negative roll yield

In the valuation of a real estate investment trust (REIT), subtracting the REIT's liabilities from the value of its real estate assets and dividing by the number of shares outstanding provides an estimate of the REIT's: A)net asset value. B)free cash flow per share. C)adjusted funds from operations.

net asset value

The period of time within which a hedge fund must fulfill a redemption request is the: A)lockup period. B)notice period. C)withdrawal period.

notice period

For which of the following investments is an investor most likely to require the greatest liquidity premium? A)Private equity funds. B)Real estate investment trusts. C)Commodity futures.

private equity funds

A private equity firm that provides equity capital to a publicly traded company to finance the company's restructuring, but does not take the company private, is best described as engaging in: A)private investment in public equity. B)angel investing. C)mezzanine financing.

private investment in public equity

The yield from an investment in commodities that results from a difference between the spot price and a futures price is the: A)roll yield. B)collateral yield. C)convenience yield.

roll yield

The value of an existing single-family home used for residential purposes will most likely be calculated using the: A)cost approach. B)income approach. C)sales comparison approach.

sales comparison approach

The formative stage of venture capital investing when capital is furnished for market research and product development is best characterized as the: A)angel investing stage. B)seed stage. C)early stage.

seed stage

The stage at which venture capital financing is used to fund market research and product development is best characterized as the: A)seed stage. B)early stage. C)angel investing stage.

seed stage

An equity hedge fund strategy that focuses primarily on exploiting overvalued securities is best described as a(n): A)fundamental value strategy. B)event driven strategy. C)short bias strategy.

short bias strategy

The typical trade used by a merger arbitrage fund is: A)short position in acquirer, long position in firm being acquired. B)long position in acquirer, short position in firm being acquired. C)short positions in both the acquirer and the firm being acquired.

short position in acquirer, long position in firm being acquired

Historical data on returns of real estate are most likely to exhibit: A)smoothing. B)downward-biased Sharpe measures. C)overstated correlations with other asset classes.

smoothing

A hedge fund that charges an incentive fee on all profits, but only if the fund's rate of return exceeds a stated benchmark, is said to have a: A)high water mark. B)soft hurdle rate. C)hard hurdle rate.

soft hurdle rate

If a commodity futures market is in backwardation: A)the commodity has a high convenience yield. B)a long futures position will have a negative roll yield. C)the futures price is of the commodity is higher than the spot price.

the commodity has a high convenience yield

To exit an investment in a portfolio company through a trade sale, a private equity firm sells: A)the portfolio company to one of the portfolio company's competitors. B)shares of a portfolio company to the public. C)the portfolio company to another private equity firm

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

Indices for alternative investments are least likely to exhibit: A)backfill bias. B)time-period bias. C)survivorship bias.

time-period bias

With respect to venture capital, the term "mezzanine-stage financing" is used to describe the financing: A)that supports product development and market research. B)to prepare for an initial public offering. C)to initiate commercial manufacturing.

to prepare for an initial public offering

The difference between a hedge fund's trading net asset value and its accounting net asset value is that: A)trading NAV tends to be lower because of illiquid assets. B)accounting NAV tends to be higher because of estimated liabilities. C)accounting NAV tends to be lower because of model prices.

trading NAV tends to be lower because of illiquid assets

A due diligence factor that is common to analyzing real estate investment trusts, hedge funds, and private equity is (are): A)dividend distribution requirement. B)drawdown procedures. C)variability of manager performance.

variability of manager performance