Ch 22 - Managed Products

Question 1

Wrap accounts

Answer 1

accounts for which a portfolio manager is authorized to select securities and execute trades on behalf of a client

Question 2

Separately managed wraps

Answer 2

Accounts are managed on a segregated basis, enabling the client to own individual securities

Question 3

what are swaps

Answer 3

over-the-counter (OTC) derivatives that are privately negotiated between two counterparties

Question 4

three types of commodity ETF

Answer 4

• physical-based
• Futures-based
• equity-based

Question 5

RISKS ASSOCIATED WITH THE USE OF DERIVATIVES, LEVERAGE,

OR COMMODITIES BY ETFs (list)

Answer 5

• Risk of roll yield loss
• Risk of front running
• Counterparty risk in derivatives
• Risk related to volatility and leverage factors
• Risk of short selling bans
• Risk related to futures position and sizes
• Credit risk in currency ETFs
• Risk of using swaps (in comparison to exchange-traded derivatives)

Question 6

IIROC GUIDANCE: SALES PRACTICE OBLIGATIONS RELATING TO LEVERAGED AND INVERSE EXCHANGE-TRADED FUNDS (LIST)

Answer 6

• investment results can be different than expected
• additional and specific KYC requirements
• dealer member sales practices must be thorough
• Appripriate supervision by Dealer members
• requisite training related to the features and risks

Question 7

Tax implication of distribution of foreign investments

Answer 7

All distributions by U.S.-listed ETFs are taxed as ordinary income. Even capital gains.

Question 8

FORM T1135—FOREIGN INCOME VERIFICATION

Answer 8

Canadian investors who own certain foreign property with a total cost over $100,000 must file form T1135. Canadian listed ETF

Question 9

offering memorandum (hedge funds)

Answer 9

legal document that states the objectives, risks, and terms of investment.

Question 10

eight factors when choosing hedge fund

Answer 10

• Fund track record
• Risk characteristics
• Hedge fund managers
• Hedge fund features (fee and
expense structure, use of leverage liquidity terms...)
• Nature of Return statistics
• tax implications
• Currency risk
• Operational risk (fraudulent activity)

Question 11

role of the prime broker (7)

Answer 11

• Trade execution
• Financing arrangements
• Collateral management
• Provide market flow information
• Pricing
• Measuring risk
• Advertise to new investors

Question 12

Role of the custodian

Answer 12

responsible for holding and tracking all of the assets and for transferring securities and cash to and from the prime broker as required.

Question 13

Role of fund administrator

Answer 13

processes subscriptions and redemptions and calculates the hedge fund’s NAV.

Question 14

Four steps to assess inclusion of hedge fund in portfolio

Answer 14

1. Assess investor suitability
2. Assess % weight of hedge fund
3. Conduct due diligence on HF
4. Monitor performance

Question 15

two ways to treat HF in an asset allocation framework:

Answer 15

as separate asset class
Within existing Portfolio asset class

Question 16

three hedge fund categories (equity and FI same)

Answer 16

Relative value equity strategies (equity market neutral)
Event-driven (medium exposure)
Directional (global macro, emerging, long/short)

Question 17

what is a Principal-protected notes (PPNs)

Answer 17

• debt instrument issued by a bank in the form of a deposit note
• delivers a return in the form of interest.
• has a maturity date where principal is returned
• interest rate is tied to the performance of an underlying asset

Question 18

SKILLS REQUIRED FOR SUCCESSFUL OVERLAY MANAGEMENT

Answer 18

• SELECTING INVESTMENT MANAGERS: DUE DILIGENCE
• ALLOCATING MANAGED PRODUCTS
• ENSURING ACCURATE REPORTING OF PERFORMANCE NUMBERS
• ASSESSING WHOLESALING SUPPORT

Question 19

outcome-based investments has been fueled by three factors:

Answer 19

• Poor relative mutual fund returns
• Large number of confusing investment styles
• need for capital preservation and income generation