CHAPTER 13: Alternative Managed Products

Question 1

Principal-Protected Notes (PPN)

Answer 1

Is a debt instrument.

Maturity date upon which the issuer agrees to pay the investors the principal.

Provide interest payments at maturity or as regular payments.

Question 2

Who issues PPN’s usually?

Answer 2

Issued by chartered banks, but not covered by CDIC

Question 3

Costs to PPN’s (disadvantages)

Answer 3

commissions, management fees, early-redemption fees (usually runs from 2-5years), structuring costs and guarantee fees (this is their major disadvantage to investors)

Question 4

PPN’s advantages

Answer 4

• investors get access to markets they ordinarily do not enter
• PPN’s can return a higher yield than other investments
• are risk-free for the principal

Question 5

PPN’s underlying assets

Answer 5

Common Stocks
Mutual Funds
Stock Indexes
Commodities
Hedge Funds

Question 6

PPN’s Risks

Answer 6

liquidity
performance
credit
currency

Question 7

4 Things to consider before investing in PPN’s

Answer 7

1) Creditworthiness of the issuer
2) understand the calculation method used to arrive at the final variable return
3) risk factors behind the underlying asset
4) protection of the principal should be worth paying for

Question 8

Hedge Funds

Answer 8

Lightly regulated pools of capital run with greater flexibility in using investment strategies not available to managers of regular mutual funds.

Question 9

Who does hedge funds target

Answer 9

High-net-worth and institutional investors

Question 10

What do they issue to inform potential clients about the fund?

Answer 10

They offer memorandums stating the objectives, risks, terms of investment involved with the private placement.

Question 11

What is a private placement?

Answer 11

sale of securities directly to institutional buyers.

ex. of institutional buyers
Banks
Pension Funds
Insurance companies
Mutual fund companies

Question 12

3 Hedge Fund Strategies

Answer 12

1) Relative Value
Exploiting inefficiencies or differences in related investment pricing

2) Event-driven
seek profits in mergers, acquisitions, stock splits, stock buybacks

3) Directional
anticipated movements in market prices

Question 13

3 differences to mutual funds and hedge funds

Answer 13

Hedge funds

• can use derivatives in any way
• may have liquidity restrictions
• Sold by offering memorandums to sophisticated investors

Mutual Funds

• Usually liquid
• Use derivatives in a limited way
• Sold by prospectus to general public

Question 14

Hedge fund risks

Answer 14

• Light regulatory oversigh
• Market risk
• Liquidity constraints
• Investment strategy risk

Question 15

Commodity pools

Answer 15

are Managed futures funds, structured and sold as mutual funds.

• trade derivative products, commodities, financial assets, and currencies
• use leveraging and short-selling
• additional licensing requirements to sell them
• Fees can be from 15%-20%

Question 16

3 Commodity Pools Advantages

Answer 16

1) absolute returns
2) diversification
3) potential to attract top management talent

Question 17

4 Commodity Pool Risks

Answer 17

1) currency
2) leverage
3) trading
4) liquidity

Question 18

Commodity Pool Fees

Answer 18

Performance fees
15%- 20%
Management fees
about 2% of customer assets

Question 19

What to consider before investing in Commodity Pools

Answer 19

Trading history that covers an entire business cycle

Question 20

Closed-end Funds

Answer 20

Managed pool of securities traded on a stock exchange.

• invest in most of the same types of assets as mutual funds, such as stocks and bonds
• fixed number of shares

Question 21

Where are closed-end funds traded?

Answer 21

Secondary market

Traded at a discount or premium

Question 22

2 Other names for Closed-end funds

Answer 22

Closed-end discretionary fund

Interval funds

Question 23

2 Advantages to closed-end funds

Answer 23

boost returns by using

1) short-selling
2) leveraging

Question 24

4 Closed-end fund Risks

Answer 24

1) trading
2) liquidity
3) leverage
4) unpredictable cash flow

Question 25

ETF

Answer 25

A basket of securities constructed like mutual funds, but traded like individual stocks on a stock exchange

• Similar to index mutual funds, they hold the same stocks, bonds, or other securities
• traded on an exchage, can be bought and sold throughout the trading day.

Question 26

ETF’s: When are commissions paid and what are the fees

Answer 26

• Commissions paid at purchase or sale of shares.

- Very low MERs (0.17% - 1.70%), can be very tax efficient.

Question 27

6 ETF Risks

Answer 27

• Market risk
• Trading risk
• Foreign market risk
• Foreign exchange risk
• Tracking error (the degree to which an ETF fails to match or mirror the index it is based upon
• Concentration risk (too high a % of the ETF in any one stock)

Question 28

Segregated Funds

Answer 28

Insurance Contract with two parts:

1) An investment that produces return
2) An Insurance policy that covers the risk

Death benefits and maturity guarantee attached.

Protects investors principal from market decline

Question 29

Who offers Segregated Funds

Answer 29

Insurance companies

to legally sell these, you need a life-insurance license – LLQP*

Question 30

5 Segregated Fund Advantages

Answer 30

Maturity Guarante (75% or 100% are typical after a 10 year holding period)

Reset Option
Renewable when term expires

Death Benefits
Beneficiary or estate

Creditor Protection

Bypassing Probate

Question 31

Cost of Segregated Funds

Answer 31

0.5 to 3% higher MER than mutual funds because of the protection

Question 32

Guaranteed Minimum Withdrawal Benefit Plan (GMWB)

Answer 32

Used to counter the risk of retirement funds being impaired by investment losses.

Client purchases a plan which gives them the option to withdraw a certain fixed percentage (7% is typical) of the initial deposit every year until the entire principal is returned, no matter how the fund performs

Potential for growth