CAIA - 06 - Family Offices

Question 1

There are two types of family offices:

1. ___ family office
2. ___-family office

Answer 1

There are two types of family offices:

1. Single family office
2. Multi-family office

Question 2

The cost of running a single family office is estimated to be about ___ basis points per year.

Answer 2

The cost of running a single family office is estimated to be about 60 basis points per year.

Question 3

A key benefit to family offices is providing a consolidated ___ ___ and ___ service.

Answer 3

A key benefit to family offices is providing a consolidated wealth management and accounting service.

Question 4

Some goals of family offices are as follows:

1. Maintain a ___
2. ___or ___ ___ for future generations
3. Maintain ___goals

Answer 4

Some goals of family offices are as follows:

1. Maintain a lifestyle
2. Preserve or grow wealth for future generations
3. Maintain charitable goals

Question 5

Family Offices provide several benefits over private banks and traditional asset managers:

1. Central source for ___ ___
2. ___
3. Dedicated ___
4. Consolidated ___

Answer 5

Family Offices provide several benefits over private banks and traditional asset managers:

1. Central source for financial management
2. Confidentiality
3. Dedicated Staff
4. Consolidated Capital

Question 6

The SEC currently permits family offices to serve up to ___ generations of family related to a designated ancestor

Answer 6

The SEC currently permits family offices to serve up to 10 generations of family related to a designated ancestor

Question 7

If a family office accepts funds from external clients, it must register with the ___, meet other ___ ___, establish a ___ ___, and set up a ___ ___.

Answer 7

If a family office accepts funds from external clients, it must register with the SEC, meet other regulatory requirements, establish a reporting structure, and set up a compliance department.

Question 8

Family Offices primarily serve ___ generations and ___.

Answer 8

Family Offices primarily serve second generations and beyond.

Question 9

Many first-generation UHNW individuals have ___ wealth positions.

Answer 9

Many first-generation UHNW individuals have concentrated wealth positions.

Question 10

The proceeds of concentrated stock positions may be invested in a ___ ___, which is a set of assets used to fill a gap in the portfolio.

Answer 10

The proceeds of concentrated stock positions may be invested in a completion portfolio, which is a set of assets used to fill a gap in the portfolio.

Question 11

The assets used in a completion portfolio should have ___ correlation with the assets in the concentrated portfolio.

Answer 11

The assets used in a completion portfolio should have low correlation with the assets in the concentrated portfolio.

Question 12

A ___ ___generates significant cash in a short period that sellers then want to invest.

Answer 12

A liquidity event generates significant cash in a short period that sellers then want to invest.

Question 13

For concentrated first-generation wealth, many FOs use an ___ return benchmark.

Answer 13

For concentrated first-generation wealth, many FOs use an absolute return benchmark.

Question 14

Allocations to cash, bonds, and absolute return investments are ___ for the endowment portfolio than for the FO portfolio.

Answer 14

Allocations to cash, bonds, and absolute return investments are larger for the endowment portfolio than for the FO portfolio.

Question 15

Allocations to risky assets that generate long-term capital gains are ___ for the FO portfolio than the typical endowment fund.

Answer 15

Allocations to risky assets that generate long-term capital gains are larger for the FO portfolio than the typical endowment fund.

Question 16

The private equity allocation is much ___ for an FO portfolio than the typical endowment.

Answer 16

The private equity allocation is much larger for an FO portfolio than the typical endowment.

Question 17

Liquid assets are assets that can be sold in less than ___ ___ at ___-___prices.

Answer 17

Liquid assets are assets that can be sold in less than three months at non-discounted prices.

Question 18

Illiquid assets are assets that can be sold within ___ ___ at ___ prices.

Answer 18

Illiquid assets are assets that can be sold within one year at discounted prices.

Question 19

Semi-liquid assets are assets that are sold between ___ ___and ___ ___.

Answer 19

Semi-liquid assets are assets that are sold between three months and one year.

Question 20

Due to the high illiquidity of most UHNW portfolios, many have a ___ ___or ___ ___ with an external bank.

Answer 20

Due to the high illiquidity of most UHNW portfolios, many have a credit line or liquidity backstop with an external bank.

Question 21

While endowment investment portfolios are driven by beta drivers, returns on many asset classes and FOs are driven by four key macroeconomic factors:

1. ___ ___
2. ___
3. ___
4. ___ ___

Answer 21

While endowment investment portfolios are driven by beta drivers, returns on many asset classes and FOs are driven by four key macroeconomic factors:

1. Real return
2. Inflation
3. Growth
4. Risk premium

Question 22

Fixed income securities are driven mostly by ___ ___and ___, while riskier assets are driven more by ___and ___ ___.

Answer 22

Fixed income securities are driven mostly by real return and inflation, while riskier assets are driven more by growth and risk premium.

Question 23

Taxable investors consider an investment’s ___ ___by structuring investments to have the lowest possible tax liability.

Answer 23

Taxable investors consider an investment’s tax efficiency by structuring investments to have the lowest possible tax liability.

Question 24

Gains from investments held for less than ___ ___ are classified as short-term capital gains.

Answer 24

Gains from investments held for less than one year are classified as short-term capital gains.

Question 25

Short-term capital gains are typically taxed at the investor's ___ \_\_\_tax rate, which is \_\_\_than the tax rate for qualified dividends.

Answer 25

Short-term capital gains are typically taxed at the investor's **ordinary income** tax rate, which is **higher** than the tax rate for qualified dividends.

Question 26

Gains from investments held for more than ___ \_\_\_ are classified as long-term capital gains.

Answer 26

Gains from investments held for more than **one year** are classified as long-term capital gains.

Question 27

Long-term capital gains are taxed at ___ rates than short-term capital gains.

Answer 27

Long-term capital gains are taxed at **lower** rates than short-term capital gains.

Question 28

The highest long-term capital gains tax rate in the U.S. is \_\_\_%.

Answer 28

The highest long-term capital gains tax rate in the U.S. is **20**%.

Question 29

Some instruments benefit from special tax treatment. Examples include ___ \_\_\_ contracts, which include instruments such as futures contracts.

Answer 29

Some instruments benefit from special tax treatment. Examples include **Section** **1256** contracts, which include instruments such as futures contracts.

Question 30

For tax purposes, \_\_\_% of gains of Section 1256 contracts are considered long-term capital gains and \_\_\_\_% are short-term gains.

Answer 30

For tax purposes, **60**% of gains of Section 1256 contracts are considered long-term capital gains and **40**% are short-term gains.

Question 31

What is the equation for 1256 contracts?

Answer 31

Question 32

Family offices can increase their tax efficiency by selecting three types of hedge funds: 1. With \_\_\_-\_\_\_ \_\_\_ 2. With ___ \_\_\_ security investments 3. With \_\_\_-\_\_\_ managers

Answer 32

Family offices can increase their tax efficiency by selecting three types of hedge funds: 1. With **long**-**term horizons** 2. With **Section 1256** security investments 3. With **tax**-**efficient** managers

Question 33

When conducting due diligence of hedge funds, family offices review the funds' Schedule ___ tax documents, which list their annual income. This enables family offices to identify \_\_\_-\_\_\_managers by seeing the amount of total return that is short and long-term capital gains.

Answer 33

When conducting due diligence of hedge funds, family offices review the funds' Schedule **K-1** tax documents, which list their annual income. This enables family offices to identify **tax**-**efficient** managers by seeing the amount of total return that is short and long-term capital gains.

Question 34

Some taxable investors prefer not to invest in hedge funds that issue ___ forms, since these forms can be \_\_\_and are often issued \_\_\_the tax filing \_\_\_.

Answer 34

Some taxable investors prefer not to invest in hedge funds that issue **K-1** forms, since these forms can be **complicated** and are often issued **after** the tax filing **deadline**.

Question 35

Another way in which family offices differ is their allocation to ___ or \_\_\_assets, which are assets that are purchased based on the lifestyle preferences or passions of family members.

Answer 35

Another way in which family offices differ is their allocation to **lifestyle** or **passion** assets, which are assets that are purchased based on the lifestyle preferences or passions of family members.

Question 36

The ___ \_\_\_ index estimates returns using two repeat sales of a piece of artwork.

Answer 36

The **repeat sales** index estimates returns using two repeat sales of a piece of artwork.

Question 37

An advantage of the repeat sales index is that the use of pairs of prices for the same artwork removes the issue of ___ as a bias in the index.

Answer 37

An advantage of the repeat sales index is that the use of pairs of prices for the same artwork removes the issue of **uniqueness** as a bias in the index.

Question 38

The repeat sales index has a number of issues 1. The ___ \_\_\_between sales can be \_\_\_ 2. Museums can remove art work from the ___ \_\_\_permanently 3. The index does not account for ___ \_\_\_transactions 4. The index does not include ___ transactions.

Answer 38

The repeat sales index has a number of issues 1. The **time period** between sales can be **long** 2. Museums can remove art work from the **trading market** permanently 3. The index does not account for **single art** transactions 4. The index does not include **private** transactions.

Question 39

The ___ \_\_\_ index measures the difference between the realized price paid at auction and the estimated price set by dealers.

Answer 39

The **rarity premium** index measures the difference between the realized price paid at auction and the estimated price set by dealers.

Question 40

The main issue with the rarity premium index is that they are based on ___ \_\_\_ sale prices

Answer 40

The main issue with the rarity premium index is that they are based on **subjective** **estimated** sale prices

Question 41

There are several reasons to argue against art as an asset class 1. Art has no ___ \_\_\_ ___ and so can be difficult to model 2. Artwork is \_\_\_, with each piece being unique 3. Artwork does not generate ___ \_\_\_ and so a present value cannot be determined 4. \_\_\_of artwork is difficult to measure since infrequent sales prevent the construction of a distribution of returns 5. Art is very \_\_\_

Answer 41

There are several reasons to argue against art as an asset class 1. Art has no **systematic risk premium** and so can be difficult to model 2. Artwork is **heterogeneous**, with each piece being unique 3. Artwork does not generate **cash flow** and so a present value cannot be determined 4. **Volatility** of artwork is difficult to measure since infrequent sales prevent the construction of a distribution of returns 5. Art is very **illiquid**

Question 42

Some art investors offset the cost of storage etc. by ___ their art.

Answer 42

Some art investors offset the cost of storage etc. by **leasing** their art.

Question 43

Artwork is often stored in ___ \_\_\_, which are specialized storage facilities used by UHNW individuals to store valuables.

Answer 43

Artwork is often stored in **free ports**, which are specialized storage facilities used by UHNW individuals to store valuables.

Question 44

Wealth growth and wealth transfer buckets may be referred to as ___ \_\_\_.

Answer 44

Wealth growth and wealth transfer buckets may be referred to as **balancing portfolios**.

Question 45

In addition to wealth management services, many family offices provide ___ \_\_\_like personal shopping, travel arrangement etc.

Answer 45

In addition to wealth management services, many family offices provide **concierge services** like personal shopping, travel arrangement etc.

Question 46

Family offices can have ___ and \_\_\_governance structures.

Answer 46

Family offices can have **formal** and **informal** governance structures.

Question 47

A ___ governance structure of a FO is one where a Board of Trustees made of mainly family members meets periodically to review and approve investments

Answer 47

A **formal** governance structure of a FO is one where a Board of Trustees made of mainly family members meets periodically to review and approve investments

Question 48

An ___ governance structure is typically controlled by the family patriarch/matriarch and the CIO.

Answer 48

An **informal** governance structure is typically controlled by the family patriarch/matriarch and the CIO.

Question 49

Most family wealth is lost before or around the ___ generation, which indicates that ___ wealth does not exist.

Answer 49

Most family wealth is lost before or around the **3rd** generation, which indicates that **dynastic** wealth does not exist.

Question 50

There are four key reasons for loss of family wealth over generations 1. ___ as the number of descendants increases 2. Lack of ___ or ___ by the family 3. ___ -\_\_\_ later generations with respect to being productive and managing the wealth 4. Focus on ___ so assets are not willed to descendants

Answer 50

There are four key reasons for loss of family wealth over generations 1. **Dilution** as the number of descendants increases 2. Lack of **skill** or **interest** by the family 3. **Ill**-**prepared** later generations with respect to being productive and managing the wealth 4. Focus on **philanthropy** so assets are not willed to descendants

Question 51

One approach to preventing wealth dilution is to hold family wealth in a \_\_\_-\_\_\_trust.

Answer 51

One approach to preventing wealth dilution is to hold family wealth in a **multi**-**generational** trust.

Question 52

\_\_\_ ___ \_\_\_ refers to planning the distribution of a family's assets in anticipation of the death of an earlier generation

Answer 52

**Family estate** **planning** refers to planning the distribution of a family's assets in anticipation of the death of an earlier generation

Question 53

\_\_\_ refers to giving money or time to social causes, generally to meet near-term needs, and with no accountability from the recipients.

Answer 53

**Charity** refers to giving money or time to social causes, generally to meet near-term needs, and with no accountability from the recipients.

Question 54

\_\_\_ refers to giving money or time to social causes with the intention of making permanent change and requiring some accountability from recipients to help themselves.

Answer 54

**Philanthropy** refers to giving money or time to social causes with the intention of making permanent change and requiring some accountability from recipients to help themselves.

Question 55

\_\_\_ ___ refers to investing with the intention of earning financial returns and generating a measurable, beneficial social impact.

Answer 55

**Impact investing** refers to investing with the intention of earning financial returns and generating a measurable, beneficial social impact.

Question 56

Impact investments are generally considered to generate \_\_\_-market financial returns.

Answer 56

Impact investments are generally considered to generate **below**-market financial returns.

Question 57

\_\_\_ ___ involves avoiding investments considered to have a negative impact on social and/or environmental issues.

Answer 57

**Negative screening** involves avoiding investments considered to have a negative impact on social and/or environmental issues.

Question 58

\_\_\_ \_\_\_involves making investments that have a positive effect on social and/or environmental issues.

Answer 58

**Positive** **screening** involves making investments that have a positive effect on social and/or environmental issues.

Question 59

There are 3 main targets for private impact investments: 1. ___ first 2. \_\_\_First 3. Impact \_\_\_

Answer 59

There are 3 main targets for private impact investments: 1. **Impact** first 2. **Finance** First 3. Impact **alpha**

Question 60

With ___ \_\_\_investments, investors focus more on the investments' social benefits.

Answer 60

With **impact first** investments, investors focus more on the investments' social benefits.

Question 61

With ___ \_\_\_investments, investors focus more on the investment's financial risk-return profile than on its social impact.

Answer 61

With **finance first** investments, investors focus more on the investment's financial risk-return profile than on its social impact.

Question 62

\_\_\_ ___ investments are based on the notion that companies that are socially responsible are eventually rewarded with above-market financial returns and companies with socially unacceptable operations are at great risk of generating below-market returns.

Answer 62

**Impact alpha** investments are based on the notion that companies that are socially responsible are eventually rewarded with above-market financial returns and companies with socially unacceptable operations are at great risk of generating below-market returns.

Question 63

The natural advantages for family offices are: 1. ___ asset allocation. 2. ___ \_\_\_capture. 3. D\_\_\_ \_\_\_. 4. S\_\_\_. 5. \_\_\_and management of assets. 6. \_\_\_of interests. 7. Higher \_\_\_. 8. \_\_\_management. 9. \_\_\_of services. 10. \_\_\_assets.

Answer 63

The natural advantages for family offices are: 1. **Aggressive** asset allocation. 2. **Liquidity premium** capture. 3. **Deal Flow**. 4. **Speed**. 5. **Governance** and management of assets. 6. **Alignment** of interests. 7. Higher **returns**. 8. **Risk** management. 9. **Centralization** of services. 10. **Lifestyle** assets.

Question 64

The ability to make direct private investments in operating companies with established cash flow is to have superior ___ \_\_\_.

Answer 64

The ability to make direct private investments in operating companies with established cash flow is to have superior **deal flow**.