Alternative investments

Question 1

A shared advantage of IPO and SPAC exit strategies for a private equity fund is their:

Answer 1

ability to win market attention.

Question 2

A private equity fund desiring to realize an immediate and complete cash exit from a portfolio company is most likely to pursue

Answer 2

A trade sale

Question 3

Which of the following forms of private debt are most likely to include additional features that grant investors the right to purchase equity in the borrowing company under certain circumstances?

Answer 3

Mezzanine and venture debt

Question 4

A feature that private debt and public debt share in the setting of their investment returns is their:

Answer 4

relationship to benchmark interest rates

Question 5

what are the typical type of loans in direct lending and how can private debt firms enhance their returns

Answer 5

Senior secured debt and can enhance returns with leveraged loans.

Question 6

Identify two categories of private debt that would typically be relied on in the growth stage or a later stage of the corporate life cycle.

Answer 6

Direct lending, mezzanine financing or leveraged lending.

Question 7

Describe the borrowing cost of unitranche debt.

Answer 7

Unitranche debt consists of a hybrid or blended loan structure combining different tranches of secured and unsecured debt into a single loan with a single, blended interest rate.

Since unitranche debt is a blend of secured and unsecured debt, its interest rate will generally fall in between the interest rates often demanded on secured and unsecured debt.

Question 8

Describe vintage year (simple concept)

Answer 8

Vintage year effects are especially important to consider when comparing different investments in private equity and venture capital. A fund that is still deploying its capital will likely exhibit negative returns in the current year, but this trend is unlikely to continue as its investments mature and capital is returned to investors. Additionally, funds that were launched just before periods of economic distress will likely generate lower returns in a given year than funds that stared during the growth stage of the business cycle. Conversely, funds that invest in early-stage companies at the start of an economic expansion can expect to earn positive excess returns.

Question 9

Private equity funds whose vintage year occurs in the expanding phase of the business cycle tend to earn excess returns by investing in companies that are:

Answer 9

early stage.

Question 10

The private capital category most likely to offer the highest diversification benefit for portfolios holding public stock and bonds is:

Answer 10

Venture capital

Question 11

true or false: Modeling private debt returns is fairly straightforward because they are a function of a benchmark public debt return.

Answer 11

False. While private debt and public debt share a reference point in being marked up from a benchmark return, modeling private equity or debt returns is not straightforward, due to a lack of good-quality data, more security-specific risk between assets, and artificially smooth returns.

Question 12

State a private debt and equity investment factor that can make performance/risk comparisons with public debt and equity inappropriate

Answer 12

There are several private debt and equity investment factors that can invalidate such comparisons:

Start-up investments carry greater risks than those of established firms.

Investments in declining industries are unlikely to sustain gains over the long term.

Ongoing performance risk in private investments can’t be easily hedged.

Question 13

Describe the life cycle segments of a private equity fund.

Answer 13

First year of investment : vintage year
Span of operations form 10 to 12 years
5 first years are about investing committed capital of limited partners and the remaining years of the PE fund is : harvesting ( exit to get a return for the LPs)

Question 14

A private equity fund whose vintage dates to a high-valuation environment most likely starts with an advantage in having rich prices for its assets.

Answer 14

False. Funds starting in a low-valuation, low-risk appetite, economic recovery phase benefit from riding the wave of an economic recovery and have an advantage over other vintages investing the bulk of their capital in a high-valuation environment preceding a market crash or a period of prolonged economic contraction.

Question 15

Which of the following entails the least risk?

Value-add real estate
Investment-grade commercial mortgage-backed securities
Residential real estate with long-term leases and many lessors

Answer 15

Of these three, investment-grade commercial mortgage-backed securities (CMBS) entail the least risk, and value-add real estate investments entail the most.

Question 16

Which of the following entails the most risk?

Mezzanine debt
Core-plus real estate strategies
Redevelopment of an existing property

Answer 16

Mezannine debt entails the most risk and core plus strategies the least.

Question 17

The first stage of development of an infrastructure asset is typically called:

Answer 17

Greenfield. Greenfield investing involves developing new assets and new infrastructure with the intention either to lease or sell the assets to the government after construction or to hold and operate the assets. Greenfield investors typically invest alongside strategic investors or developers that specialize in developing the underlying assets. The subsequent stages of development of infrastructure assets are typically called secondary stage and brownfield.

Question 18

Direct infrastructure investment involves assets that are:

illiquid.
securitized.
exchange traded.

Answer 18

Illiquid

Question 19

Which of the following types of infrastructure investments has the highest expected return?

Greenfield
Brownfield
Secondary stage

Answer 19

Greenfield investments They also entail the highest expected risk. Secondary stage offers the lowest expected return and the lowest expected risk.

Question 20

Which of the following tends to make the largest allocations to the infrastructure asset class?

Pension funds
Sovereign wealth funds
Life insurance companies

Answer 20

Sovereign wealth funds. Arount 5 to 6% of AUM.

Question 21

Why is there Limits to diversification in real estate

Answer 21

While it might be possible to create a portfolio of lot of unique real estate assets, high individual costs make it difficult to diversify.

Question 22

Are existing real estate indexes investable

Answer 22

Lack of investable indexes: Unlike equity or fixed-income indexes, real estate indexes are not investable. They reflect the collective performance of properties that are owned by institutional investors.

Question 23

The largest sector of the real estate market is:

Answer 23

Residential with more than 75% of global real estate values in 2018

Question 24

what is the business strategy for equity reits

Answer 24

The business strategy for equity REITs is to maximize property occupancy rates and rents while minimizing ongoing operating and maintenance expenses to maximize cash income and dividends.

Question 25

When a property title that is transferred to a new owner is unencumbered by any financing liens, such as from outstanding mortgages, the new ownership is considered:

Answer 25

Free and clear . “Free and clear” refers to the lack of any financing liens on a purchased property. If a direct private investor purchases a property and receives a title that is unencumbered by any financing liens, that ownership is considered free and clear

Question 26

In what ways are real estate investments similar to equity investments?

Answer 26

Real estate investments can be similar to equity investments in that they are speculative returns that can be realized from price appreciation of the real estate asset

Question 27

Historically, more than half of the total return on real estate as an overall asset class is attributable to - , with - representing the smaller component of investor’s returns.

Answer 27

Rental income , capital appreciation

Question 28

real estate investments can be thought of as being like

Answer 28

convertible bonds — steady cash flows with the potential for price appreciation.

Question 29

Unlike appraisers, equity investors tend to place heavy emphasis on:
RECENT TRENDS
DCF
MARKET’S CURRENT CONDITIONS

Answer 29

DCF. Equity investors in public real estate discount future cash flows, while appraisers of private real estate place heavy emphasis on current market conditions and recent trends.

Question 30

Which of the following is least likely to be listed among the advantages of investing in infrastructure assets?

The high cost of assets

Inelastic demand for assets

Low correlation with inflation

Answer 30

C. Because Infrastructure assets tend to provide protection against inflation, meaning that there is a positive correlation between their returns and inflation.

Because demand for infrastructure assets (e.g., bridges) tends to be relatively inelastic, the cash flows that they provide to investors tend to be relatively stable.

Although investors prefer not to overpay for assets, the relatively high cost of infrastructure assets can be beneficial because relatively few institutions have the financial resources needed to invest in this space. This high barrier to entry is an advantage for those investors that are able to bid on these assets.

Question 31

Compared with direct investment in infrastructure, publicly traded infrastructure securities are characterized by:

higher concentration risk.

more transparent governance.

greater control over the infrastructure assets.

Answer 31

B is correct. Publicly traded infrastructure securities, which include shares of companies, exchange-traded funds, and listed funds that invest in infrastructure, provide the benefits of transparent governance, liquidity, reasonable fees, market prices, and the ability to diversify among underlying assets. Direct investment in infrastructure involves a large capital investment in any single project, resulting in high concentration risks. Direct investment in infrastructure provides control over the assets and the opportunity to capture the assets’ full value.

Question 32

Infrastructure cash flows primarily arise from:

dividends.
commercial tenants.
contractual payments

Answer 32

contractual payments

Question 33

Most infrastructure assets are financed, owned, and operated by:

Answer 33

Governments

Question 34

Which of the following is a characteristic of direct investment in infrastructure?

High liquidity
Concentration risk
Short-term horizon

Answer 34

B. Direct investment in infrastructure requires a large investment and results in both concentration and liquidity risks while the assets are managed and operated. Because of these risks and the typical long-term horizon, direct infrastructure investment usually takes place with a group or consortium of strategic investors that share the financial risk and/or assume a specific role in building, operating, or managing the assets.

Question 35

Which of these types of infrastructure investment has the highest expected risk?

Regulated industry
Social infrastructure
Demand-based infrastructure

Answer 35

Demand-based infrastructure investments have the highest expected risk of the three. Social infrastructure has the lowest.

Question 36

Which of the following describes a non-cash benefit of holding a physical commodity rather than a derivative contract on the same commodity?

Interest
Convenience yield
Storage

Answer 36

B is correct. In market environments in which physical inventories of a commodity become low, investors in that commodity will prefer to hold the physical asset rather than a derivative contract with the asset as an underlying. The premium on the spot price resulting from this preference is called the convenience yield. A and B are both incorrect because interest and storage reflect costs associated with owning the physical commodity.

Question 37

Which of the following statements most correctly reflects commodity supply and demand fundamentals?

Supply of commodities adjusts equally to demand for commodities.
Supply of commodities adjusts more rapidly than does demand for commodities.
Supply of commodities adjusts more slowly than does demand for commodities.

Answer 37

C is correct. Commodity supply adjusts slowly to demand because of long production times; for example, agricultural crops require a growing cycle.

Question 38

Identify the three primary return drivers of investing in timberland

Answer 38

(1) the biological growth of the timber to be harvested in the future, (2) the price of lumber, and (3) changes in the price of the land.

Question 39

The primary difference between investments in timberland and investments in farmland is most likely that:

farmland has less flexibility in harvesting.

investments in farmland are not used as inflation hedges.

commodity prices are not a primary driver of returns for investments in timberland.

Answer 39

Timberland is more flexible in harvesting, since timber can be stored easily by not harvesting, while farmland must be harvested when ripe.

Commodity price changes are a primary driver of returns for investments in both timberland and farmland.

Farmland is often used as a hedge against inflation.

Question 40

Which of the following statements provides the most accurate description of timberland investment management organizations?

TIMOs are entities that use their forest investment expertise to analyze and acquire suitable timberland holdings on behalf of institutional investors.

TIMOs are investment funds that raise money from individual investors to buy timberland.

TIMOs are entities that only facilitate direct ownership of timberland by institutional investors.

Answer 40

A is the correct response. Timberland requires asset-specific expertise, and TIMOs use their expertise to analyze and acquire timberland holdings either directly or indirectly for institutional investors. B is incorrect because TIMOs are not investment funds. C is incorrect because TIMOs can be used by institutional investors in conjunction with indirect investing in timberland.

Question 41

Describe one important similarity and one important difference between investing in timberland versus investing in real estate.

Answer 41

Similarities between timberland and real estate include the fact that both asset classes involve investing in unique assets with distinct geography and the fact that both asset classes have a high degree of illiquidity.

An important difference between the two asset classes is the degree to which value reflects physical improvements to the land. Specifically, real estate investing values actual and potential improvements while timberland investing does not.

Question 42

A primary risk to investing in timber is most likely its:

Answer 42

dependence on an international competitive context.

Question 43

Describe a significant difference in the income component of farmland investing versus timberland investing.

Answer 43

Timberland provides flexibility in the timing of harvesting trees. Unlike timberland, farm products must be harvested when ripe, with little flexibility in production.

Question 44

Which of the following most correctly describes a significant difference between farmland and timberland investment?

Timberland provides environmental benefits because of the ability of trees to absorb carbon, while farmland does not.

Farmland provides a resource necessary for human existence, while timberland does not.

Farmland is commonly family owned, while timberland is commonly owned by institutional investors.

Answer 44

C is correct. Timberland tracts typically consist of thousands (or more) of acres of land, while farmland is quite frequently owned in smaller tracts of tens or hundreds of acres. As such, farmland is much more suited to family ownership, while timberland is more commonly owned by institutions.

A is incorrect because carbon offset is capable in both trees (i.e., timberland) and crops (i.e., farmland).

B is incorrect because the lumber from timberland provides the raw material for housing, which is a basic human need.

Question 45

Which of the following statements is most correct about investors seeking commodity exposure through a commodity trading adviser (CTA)?

The investor is seeking to make direct investment in commodities.
The investor is seeking to benefit from an income stream from commodities.
The investor is seeking to profit from specific directional trends in commodity futures contracts.

Answer 45

C is correct. Commodity trading advisers devise trading strategies using derivative contracts on commodities that are focused on predicting upcoming bull or bear trends. A is incorrect because CTAs do not advise on physical commodity transactions. B is incorrect for a similar reason, because the income stream from most commodities would require direct or indirect land ownership, which produces commodities.

Question 46

Explain why low inventories of a commodity may result in backwardation for the commodity.

Answer 46

Backwardation reflects a downward-sloping term structure of prices for a commodity. In the near term, backwardation implies forward price below spot price. Low inventories of a commodity cause investors to prefer to hold the physical commodity over derivative contracts (i.e., forwards). This preference will cause price for the physical asset to be bid higher, and if this non-cash benefit of owning the physical commodity (also known as convenience yield) exceeds costs of ownership of the commodity (such as interest and storage), then the spot price of the commodity exceeds its forward price.

Question 47

Contrast the pricing of commodities with the pricing of farmland/timberland investments.

Answer 47

Commodities are priced on public exchanges, and their pricing reflects the latest information. Land investments, such as farmland and timberland, are traded only when actual transactions occur; thus pricing is infrequent and relies on imprecise estimates.

Question 48

Explain why commodity supply is usually slow to adjust to changes in demand for the commodity.

Answer 48

Commodity supply adjusts slowly to changes in commodity demand because producers are unable to alter supply quickly due to the need for extended lead times to affect production levels. For example, increased demand for a specific agricultural crop requires at least one growing cycle to produce more supply.

Question 49

Explain one rationale as to why consumer price inflation is likely to be less volatile than commodity prices.

Answer 49

One possible rationale is that consumer price inflation reflects many additional products beyond commodities (such as housing), which dampens the effect of commodity prices on inflation.

Another possible rationale is that statistical techniques used to compute consumer price inflation cause smoothing in the data while commodity prices reflect real-time changes on public exchanges.

Question 50

Describe relative value strategies

Answer 50

Relative value strategies seek to profit from a price or return discrepancy between securities based on a short-term relationship.
Relative value funds are inherently structured to minimize net market risk and credit risks.

Question 51

Which of the following is not a characteristic of hedge funds?

Hedge funds are mostly illiquid, with little trading possibilities.
Hedge fund managers use leverage; however, the overall risk is lower.

Hedge funds are a different asset class, with a distinct risk/reward profile.

Managers demand higher remuneration and have more discretionary freedom in the choice of investments.

Answer 51

C is correct. Hedge funds invest in traditional asset classes but use a specific investment strategy. They are not a distinct asset class.

Question 52

Both event-driven and macro hedge fund strategies use:

Answer 52

long short-positions

Question 53

An investor may prefer a single hedge fund to a fund of funds if she seeks:

Answer 53

Less complex fee structure

Question 54

A investor who wants to secure the right to co-invest with a hedge fund manager will most likely:

Answer 54

reach a side letter agreement.

The basic terms offered to all hedge fund limited partners are stated in the fund’s private placement memorandum. Limited partners who want to negotiate additional terms, such as the right to co-invest, must reach a superseding side letter agreement with the general partner.

A master feeder structure is used to minimize a hedge fund’s tax obligations.

A separately managed account is an alternative to a hedge fund. Under this “fund of one” arrangement, a manager works exclusively on behalf of a single investor.

Question 55

Both hedge funds and private equity invest in equity stock of public or private enterprises, and there are many commonalities between them. The following statements are some of the commonalities, and one of these statements is false. Choose the false statement.

Both are structured as partnerships of investors with private pooling of funds and are primarily intended for high-net-worth individuals.

Both utilize leverage to invest in a variety of marketable securities.

Both are less liquid than mutual funds or ETFs.

Both are less regulated, and the transparency/reporting requirements are not strict.

Answer 55

B is false. Hedge funds normally invest in public securities (including debt, equity, and derivatives), while private equity funds invest directly in private operating companies, which are not marketable securities, nor do private equity firms apply leverage to their fund.

Question 56

oth hedge funds and private equity invest in equity shares of public or private enterprises. However, there are many differences between them. The following statements lists some of their differences. Choose the statement that is false.

Private equity funds invest for the long term, while hedge funds invest in equities for the shorter term.

Typical hedge funds are transaction oriented; they make several offsetting trades. Private equity funds make stable, long-term investments in few companies.

An investor normally funds the hedge fund at the start of the investment, while private equity funds are committed at the start and funded over time, upon demand.

Private equity is redeemable on a periodic basis, while hedge funds require a longer-term commitment.

Answer 56

D is the correct answer choice because the statement is false. Hedge funds are redeemable on a periodic basis, and private equity funds require a longer-term commitment. The other statements are correct.

Question 57

How many of the following statements comparing hedge funds and ETFs are true?

1. ETFs are exchange-traded public securities, while hedge funds are private partnership funds.
2. Any investor can invest in an ETF, while specific restrictions apply to who can invest in a hedge fund.
3. ETFs have very low fees and expense ratios compared to hedge funds.
4. ETFs are highly regulated, with specific reporting requirements, while hedge funds are lightly regulated.

Answer 57

All for statements are true !

Question 58

Select the statements that are true:

A. The primary drivers of returns from stocks are growth projections, dividends, and retained earnings.

B. The primary drivers of returns from a bond are interest rates, credit risk, and coupon payments.

C. The primary drivers of return from hedge funds are market volatility and market inefficiency.

Answer 58

All three are true !

Question 59

Which of the following statements about SMAs is least accurate?

SMAs are a preferred choice of high-net-worth investors with specific investment mandates because they are highly customizable.

SMAs provide better transparency for the investor than other fund structures.

SMAs are characterized by simpler fee structures compared to mutual funds.

The potential for conflicts of interest exists for SMAs since managers are not personally invested in the funds and the regulation requirements are ligh

Answer 59

C is correct because it is the least accurate statement. Mutual fund fees are clearly disclosed in the fund prospectus. The SMA fees are negotiated with the manager for each account and require sufficient care to structure in a way to incentivize the manager. A, B, and D are accurate statements.

Question 60

Which of the following is least likely an investor objective that would help inform the choice of a specific fund structure?

Reduce tax leakage and enhance returns by efficient tax planning

Ensure an appropriate amount of investor control on companies and strategies

Maximize the net returns on the investments

Reduce the regulatory and compliance requirements

Answer 60

C is correct because it is the least likely investor objective. The objective of the investment manager is to maximize the returns, while the objective of the structure is to ensure that the other options (Choices A, B, and D) are taken care of.

Question 61

Which of the following best explains why it is unlikely a poor-performing hedge fund would be added to an index?

Survivorship bias

Backfill bias

Selection bias

Answer 61

C is correct. Selection bias refers to when the benchmark inclusion criteria cover only those funds that have good performance and hence report their performance to attract new investors.

A is incorrect; survivorship bias is when the benchmark stops including funds that have ceased operations, most likely due to poor performance, and hence does not fully represent the hedge fund universe.

B is incorrect; backfill bias occurs when an index retroactively includes the performance of a fund before it is added to the index.

Question 62

An investor wants to invest in a diversified hedge fund that minimizes the return correlation with the traditional asset classes but would prefer the fund to be more liquid and transparent while minimizing the leverage obtained by borrowing or shorting. What would be the most appropriate hedge fund the investor can choose?

Fundamental value
Managed futures
Multi-strategy
Fund of funds

Answer 62

B is correct. Managed futures have, historically, exhibited low correlation with traditional assets and invest in active futures in liquid commodities and foreign exchange markets. They are also able to increase exposure without resorting to borrowing or shorting.

Question 63

An indirect investment in digital assets can be made through:

entering into cryptocurrency futures.
purchasing Bitcoins on cryptocurrency wallets.
participating in the initial coin offering of a new digital token.

Answer 63

Investors interested in an indirect investment in digital assets can trade cryptocurrency futures on established exchanges, such as the Chicago Mercantile Exchange. However, the purchase of Bitcoins and buying new tokens through an initial coin offering are direct forms of investment.

Question 64

A cryptocurrency ETF seeks to

Answer 64

A cryptocurrency ETF seeks to replicate digital asset investment returns by cash and cryptocurrency derivatives.

Question 65

Early investors in cryptocurrencies have enjoyed significant price appreciation but many later-stage investors suffered huge losses most likely because:

Question 66

The process where a node on a blockchain network pledges its digital asset to verify a new block’s validity is called:

tokenization.
proof of work.
proof of stake

Answer 66

This proof-of-stake protocol requires selected participants on a blockchain network, the validators, to pledge digital assets to vouch for the block’s validity. This stake signals to the network that a validator is available to verify the veracity of a transaction and propose a block. Other validators who stake a digital asset to the network must then attest to the validity of proposed block. Validators benefit from both proposing and attesting to the validity of blocks that have been proposed by other participants in a similar staking process in the form of new digital assets.

Question 67

Tokenization most likely benefits investors who trade:

Answer 67

REAL ESTATE because Tokenization, which is defined as “the process of representing ownership rights to physical assets on a blockchain or distributed ledger,” has the potential to reduce the need for intermediaries involved in transactions involving physical assets, notably real estate. Historically, the process of verifying ownership for real estate transactions has required multiple intermediaries working with decentralized paper records.

Question 68

A benefit of DLT favoring its use by the investment industry is its:

Answer 68

Ability to Streamline the existing, often complex and labor-intensive post-trade processes in securities markets

Question 69

The ownership and exchange of digital assets on permissionless networks are usually recorded on a:

Answer 69

Decentralized ledger without any central intermediary.

Question 70

Describe the two types of stablecoins

Answer 70

The traditional type of stablecoin, or “securitized stablecoin,” is backed by physical collateral of fiat currencies, precious metals, or other financial assets as reserves for every stablecoin issued. Each coin can be traded freely on the open market or redeemed for its dollar value from the issuer by liquidating the collateral. A special example of the stablecoin is the asset-backed token, which maintains price parity with some target asset—for example, the US dollar or gold—through tokenization.

Another unique type of stablecoin is called a “smart stablecoin” or an “algorithmic stablecoin,” because there is no backing of physical assets for the cryptocurrency. Rather, its value is backed by another cryptocurrency or token and is linked to the US dollar “algorithmically” instead of using actual dollar reserves.

Question 71

Asset-backed tokens have the potential of improving the liquidity of the underlying assets because:

Answer 71

They allow for fractional ownership of high-value assets.

Question 72

Compared to traditional equity investment, the historical return distribution of Bitcoins shows:

Answer 72

Historical Bitcoin returns are characterized by high mean returns and high standard deviation. Despite the high volatility, the return distribution is positively skewed.

Question 73

Identify the fee approach that most directly encourages private equity fund managers to invest selectively, not just quickly. Management fees:

A.based on committed capital
B.combined with an incentive fee
C.based on a fixed percentage of assets under management

Answer 73

The correct answer is A. Private equity funds typically calculate their management fee based on committed capital, which is the total amount that the limited partners have promised to fund future investments, rather than based on assets under management. The committed-capital basis for management fees is an important distinction from hedge funds, whose management fees are typically based on assets under management. Having committed capital as the basis for management fee calculations reduces the incentive for GPs to deploy the committed capital as quickly as possible to grow their fee base and thus allows the GPs to be selective about deploying capital into investment opportunities. B is incorrect because alternative investment funds usually combine a management fee with a performance fee paid when fund returns exceed a specified hurdle rate. Although this combined fee approach is typical for alternative investment funds, it is not what encourages managers to invest selectively, rather than quickly. C is incorrect because typically hedge funds and REITs charge a management fee on assets under management, while private equity funds instead levy management fees on committed capital.