AI 1

Question 1

What are alternative Investments? What are the general characteristics of AI?

Answer 1

General characteristics:
- High fees: requires active mgmt and expertise thus management fees are high.
- Low diversification within alternative investments portfolio
- High use of leverage
- Illiquid, restrictions on redemptions
- Narrow manager specialization: Managers are required to have fairly high level of expertise within a sector/strategy.
- Low correlation with traditional investments
- Low level of regulation and less transparency
- Limited & potentially problematic risk & return data
- Unique legal & tax considerations

Question 2

Active Management vs Passive Mgmt? Investment structures of Hedge Funds & Private Equity?

Answer 2

• Beta return vs alpha return (oppurtunities exist and can be exploited)

– Partnership is the most common: Fund is the general partner (GP), usually a limited liability company and investors are limited partners (LPs).
GP charge a mgmt fee based on AUM plus an incentive fee based on realized profits

Question 3

What is a Hedge Fund?

Answer 3

some characteristics:
- Aggressively managed portfolio of investments across asset classes & regions that is leveraged, takes long & short positions, and/or uses derivatives.
- Goal = generating higher returns, either in absolute sense or over a specified market benchmark & has a few, if any, investment restrictions.
- Set up as a private investment partnership open to only a limited no. of investors willing & able to make a large initial investment.
- Often imposes restrictions on redemptions