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CAIA > CAIA - 06 - Family Offices > Flashcards

CAIA - 06 - Family Offices Flashcards

1
Q

There are two types of family offices:

  1. ___ family office
  2. ___-family office
A

There are two types of family offices:

  1. Single family office
  2. Multi-family office
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2
Q

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

A

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

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3
Q

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

A

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

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4
Q

Some goals of family offices are as follows:

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

Some goals of family offices are as follows:

  1. Maintain a lifestyle
  2. Preserve or grow wealth for future generations
  3. Maintain charitable goals
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5
Q

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

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

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
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6
Q

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

A

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

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7
Q

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

A

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.

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8
Q

Family Offices primarily serve ___ generations and ___.

A

Family Offices primarily serve second generations and beyond.

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9
Q

Many first-generation UHNW individuals have ___ wealth positions.

A

Many first-generation UHNW individuals have concentrated wealth positions.

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10
Q

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.

A

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.

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11
Q

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

A

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

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12
Q

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

A

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

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13
Q

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

A

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

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14
Q

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

A

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

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15
Q

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

A

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

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16
Q

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

A

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

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17
Q

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

A

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

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18
Q

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

A

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

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19
Q

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

A

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

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20
Q

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

A

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

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21
Q

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. ___ ___
A

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
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22
Q

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

A

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

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23
Q

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

A

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

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24
Q

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

A

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

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25
Q

Short-term capital gains are typically taxed at the investor’s ___ ___tax rate, which is ___than the tax rate for qualified dividends.

A

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.

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26
Q

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

A

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

27
Q

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

A

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

28
Q

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

A

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

29
Q

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

A

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

30
Q

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

A

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

31
Q

What is the equation for 1256 contracts?

A
32
Q

Family offices can increase their tax efficiency by selecting three types of hedge funds:

  1. With ___-___ ___
  2. With ___ ___ security investments
  3. With ___-___ managers
A

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
33
Q

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.

A

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.

34
Q

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 ___.

A

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.

35
Q

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.

A

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.

36
Q

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

A

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

37
Q

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.

A

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.

38
Q

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.
A

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.
39
Q

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

A

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

40
Q

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

A

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

41
Q

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 ___
A

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
42
Q

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

A

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

43
Q

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

A

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

44
Q

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

A

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

45
Q

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

A

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

46
Q

Family offices can have ___ and ___governance structures.

A

Family offices can have formal and informal governance structures.

47
Q

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

A

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

48
Q

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

A

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

49
Q

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

A

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

50
Q

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
A

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
51
Q

One approach to preventing wealth dilution is to hold family wealth in a ___-___trust.

A

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

52
Q

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

A

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

53
Q

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

A

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

54
Q

___ 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.

A

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.

55
Q

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

A

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

56
Q

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

A

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

57
Q

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

A

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

58
Q

___ ___involves making investments that have a positive effect on social and/or environmental issues.

A

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

59
Q

There are 3 main targets for private impact investments:

  1. ___ first
  2. ___First
  3. Impact ___
A

There are 3 main targets for private impact investments:

  1. Impact first
  2. Finance First
  3. Impact alpha
60
Q

With ___ ___investments, investors focus more on the investments’ social benefits.

A

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

61
Q

With ___ ___investments, investors focus more on the investment’s financial risk-return profile than on its social impact.

A

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

62
Q

___ ___ 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.

A

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.

63
Q

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.
A

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.
64
Q

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

A

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

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