Alternative Investments

Question 1

Accredited Investors

Answer 1

> 200k/yr income
300k/yr income joint in last 2 years
1M NW
5M Trust

Question 2

Qualified Purchasers

Answer 2

• ind with >5M investments
  >225M in investments for institutional investors
  >5M family owned company investments
• trusts with less than $25 million where the trustee and all contributors are qualified purchasers

Question 3

Hedge Funds v Mutual Funds

Answer 3

Hedge Fund
* Transparency: Limited
Liability Partnerships with
minimal disclosure of
strategy and portfolio
composition
* Investors: No more than
100 “sophisticated” and
wealthy investors
*Very flexible
* Often use shorting,
leverage, options
higher fees (2 + 20)
Mutual Fund
* Transparency: Regulations
require public disclosure of
strategy and portfolio
composition
* Investors: Number is not
limited
*Predictable, stable
strategies, stated in
prospectus
* Limited use of shorting,
leverage, options
lower fees

Question 4

taxation of REITs

Answer 4

• dividends taxed as OI unless qualified
• gains often considered tax friendly
• income tax-exempt at trust level if they distrib >90% of income to unitholders

Question 5

Backfill Bias

Answer 5

Hedge funds only report returns if they choose to

Question 6

Survivorship Bias

Answer 6

Failed funds drop out of the database. Attrition rates are >2x that of MFs

Question 7

Alternative Beta

Answer 7

alts can have diff risk exposure so the risk premium is deiff/less than perfectly correlated with traditional markets

a form of added value thru diversification

Question 8

Terminal Value

Answer 8

the PV of cash flows and value at some specific point in time in the future

Question 9

Absolute Return

Answer 9

strategy that employs multiple strategies to get positive returns, no matter the type of market

Question 10

arbitrage

Answer 10

opportunity to earn a profit w/o risk or net investment of money. gains made on mispricing/price inconsistencies
ex. buying an undervalued asset while also shorting an overvalued equivalent asset.

Question 11

Managed Futures

Answer 11

investment in commodity futures and cash equiv.

Question 12

Directional vs Non Directional Hedge Funds

Answer 12

Directional: believes one sector will outperform. Ex. Dedicated short bias

Non-directional: market neutral

Question 13

Convergence

Answer 13

HF investment strategy where one asset is bought and another similar asset is sold at a higher price (arbitrage strategy)

Question 14

Divergence

Answer 14

strategies that bet on price/valuation of assets/investment/spreads moving away from one another