Chapter 2 CAIA

Question 1

The Participants in the Alternative Investment Space

Answer 1

the buy side, the sell side, outside service providers, and regulators.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 23). Wiley. Edición de Kindle.

Question 2

The Buy Side

Answer 2

Refers to the institutions and entities that buy large quantities of securities for the portfolios they manage. Buy side entities include asset owners and asset managers.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 23). Wiley. Edición de Kindle.

Question 3

Plan Sponsors

Answer 3

A plan sponsor is a designated party, such as a company or an employer, that establishes a health care or retirement plan (pension) that has special legal or taxation status, such as a 401(k) retirement plan in the United States for employees.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 23). Wiley. Edición de Kindle.

Question 4

Responsibilities of Plan Sponsors

Answer 4

Plan sponsors are responsible for determining membership parameters and investment choices and, in some cases, providing contribution payments in the form of cash or stock (or both). In many cases, one individual, the plan trustee, is designated with overall responsibility for managing the plan’s assets, whereas the plan administrator is charged with overseeing the plan’s day-to-day operations. Both the trustee and the administrator are identified in the plan’s summary plan description.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 23). Wiley. Edición de Kindle.

Question 5

Foundation

Answer 5

A foundation is a non profit organization that donates funds and support to other organizations for its own charitable purposes.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 24). Wiley. Edición de Kindle.

Question 6

Endowment

Answer 6

An endowment is a fund bestowed on an individual or institution (e.g., a museum, university, hospital, or foundation) to be used by that entity for specific purposes and with principal preservation in mind.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 24). Wiley. Edición de Kindle.

Question 7

Family Office

Answer 7

A family office is a group of investors joined by familial or other ties who manage their personal investments as a single entity, usually hiring professionals to manage money for members of the office.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 24). Wiley. Edición de Kindle.

Question 8

Sovereign Wealth Funds

Answer 8

State-owned investment funds held by that state’s central bank for the purpose of future generations and/or to stabilize the state currency.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 24). Wiley. Edición de Kindle.

Question 9

Private Limited Partnerships

Answer 9

Private limited partnerships are a form of business organization that potentially offers the benefit of limited liability to the organization’s limited partners (similar to that enjoyed by shareholders of corporations) but not to its general partner. For tax purposes, limited partnerships tend to flow taxable revenue and expenses directly through to their partners rather than being taxed at the partnership level.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 24). Wiley. Edición de Kindle.

Question 10

Private Investment Pools

Answer 10

Hedge funds, funds of funds, private equity funds, managed futures funds, commodity trading advisers (CTAs), and the like are private investment pools that focus on serving as intermediaries between investors and alternative investments.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 24). Wiley. Edición de Kindle.

Question 11

Separately Managed Accounts

Answer 11

Separately managed accounts (SMAs) are individual investment accounts offered by a brokerage firm and managed by independent investment management firms. The relationship between an investment adviser and a client to which it provides advice is typically documented by a written investment management agreement.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 25). Wiley. Edición de Kindle.

Question 12

Five ways that SMA’s are differentiated from funds

Answer 12

A fund investor owns shares of a company (the fund) that in turn owns other investments, whereas an SMA investor actually owns the invested assets as the owner on record.

A fund invests for the common purposes of multiple investors, whereas an SMA may have objectives tailored to suit the specific needs of its only investor, such as tax efficiency.

A fund is often opaque to its investors to promote confidentiality; an SMA offers transparency to its investor.

Fund investors may suffer adverse consequences from other investors’ redemptions (withdrawals) and subscriptions (deposits), but an SMA provides protection from these liquidity issues for its only investor.

Whereas the fund structure may allow investors to have limited liability, the SMA format may allow losses to be greater than the capital contribution when leverage or derivatives are used.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 25). Wiley. Edición de Kindle.

Question 13

Mutual Funds

Answer 13

Registered investment pools offering their shareholders pro rata claims on the fund’s portfolio of assets. In the United States, mutual funds that offer their shares for sale to the public are known as ’40 Act funds due to the regulations that permit their offering by registered investment advisers: the U.S. Investment Company Act of 1940. In recent years, ’40 Act funds have increasingly offered alternative asset exposures through these retail fund structures. A general discussion is provided in section 2.4, along with more specific discussions throughout Parts 2 through 5.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 25). Wiley. Edición de Kindle.

Question 14

Master Limited Partnerships

Answer 14

Master limited partnerships (MLPs) are publicly traded investment pools that are structured as limited partnerships and that offer their owners pro rata claims. Like equities, MLP units are traded on major stock exchanges, but they have legal and tax structures similar to those of private limited partnerships.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 25). Wiley. Edición de Kindle.

Question 15

Sell Side

Answer 15

Sell-side institutions, such as large dealer banks, act as agents for investors when they trade securities. Sell-side institutions make their ​research available to their clients and are more focused on facilitating transactions than on managing money.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 25-26). Wiley. Edición de Kindle.

Question 16

Large Dealer Banks

Answer 16

Large dealer banks are major financial institutions, such as Goldman Sachs, Deutsche Bank, and the Barclays Group, that deal in securities and derivatives. Although based on the same economic principles as typical retail banks, large dealer banks are much bigger and more complex. The macroeconomic impact of a large dealer bank failure may be more widespread because of the central role this type of bank plays in the economic system at large. Generally, most large dealer banks act as intermediaries in the markets for securities, repurchase agreements, securities lending, and over-the-counter (OTC) derivatives. In addition, large dealer banks are often engaged in proprietary trading and brokering hedge funds.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 26). Wiley. Edición de Kindle.

Question 17

Services of Large Dealer Banks

Answer 17

Large dealer banks also have large asset management divisions that cater to the investment management needs of institutional and wealthy individual clients. This involves custody of securities, cash management, brokerage, and investment in alternative investment vehicles, such as hedge funds and private equity partnerships that are then managed by the same banks. Some of these types of banks operate internal hedge funds and take on private equity partnerships as part of their business management service. In this role, the bank acts as a general partner with limited-partner clients.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 26). Wiley. Edición de Kindle.

Question 18

Role of Large Dealer Banks in the Primary Market

Answer 18

The role of dealer banks in the primary market is to intermediate between issuers and investors, to provide liquidity, and to act as underwriters of investments.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 26). Wiley. Edición de Kindle.

Question 19

Role of Large Dealer Banks in the Secondary Market

Answer 19

In secondary securities markets, large dealer banks trade with one another and with brokers/dealers directly over the computer or the phone, as well as play an intermediating role of facilitating trades.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 26). Wiley. Edición de Kindle.

Question 20

Proprietary Trading

Answer 20

Proprietary trading occurs when a firm trades securities with its own money in order to make a profit.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 26). Wiley. Edición de Kindle.

Question 21

Why do companies use off balance sheet transactions

Answer 21

Companies use off-balance-sheet financing to keep their debt-to-equity and leverage ratios low.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 26). Wiley. Edición de Kindle.

Question 22

How are brokerage firms typically organized?

Answer 22

(1) front office,
(2) back office, and
(3) middle office.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 27). Wiley. Edición de Kindle.

Question 23

Front Office

Answer 23

Front office operations involve investment decision-making and, in the case of brokerage firms, contact with clients.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 27). Wiley. Edición de Kindle.

Question 24

Back Office Operations

Answer 24

Back office operations play a supportive role in the maintenance of accounts and information systems used to transmit important market and trader information in all trading transactions, as well as in the clearance and settlement of the trades.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 27). Wiley. Edición de Kindle.

Question 25

Middle Office Operations

Answer 25

Middle office operations form the interface between the front office and the back office, with a focus on risk management.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 27). Wiley. Edición de Kindle.

Question 26

Prime Brokers

Answer 26

Prime brokers allow an investment manager to carry out trades in multiple financial instruments at multiple broker-dealers while keeping all cash and securities at a single firm.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 27). Wiley. Edición de Kindle.

Question 27

Role of a Prime Broker

Answer 27

Clearing and financing trades for its client, providing research, arranging financing, and producing portfolio accounting.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 27). Wiley. Edición de Kindle.

Question 28

Depository Trust Corporation

Answer 28

The principal holding body of securities for traders all over the world and is part of the Depository Trust and Clearing Corporation (DTCC), which provides clearing, settlement, and information services.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 29). Wiley. Edición de Kindle.

Question 29

Universal Banking

Answer 29

Germany uses universal banking, which means that German banks can engage in both commercial and investment banking. Also unlike the United States, a large portion of German firms is privately funded and has two governance bodies: the Vorstand, or management board, and the Aufsichtsrat, or supervisory board.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 30). Wiley. Edición de Kindle.

Question 30

Securitisation

Answer 30

Securitization involves bundling assets, especially unlisted assets, and issuing claims on the bundled assets. The securities are registered and sold in the public market. Securitization can allow firms to divest illiquid assets such as accounts receivable to lay off risk and obtain cash. Various types of unlisted but liquid assets are also securitized, including various fixed-income securities such as mortgages. Exchange-traded funds are emerging as a major source of securitization, in which new securities are created, generally with underlying portfolios of listed securities.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 31). Wiley. Edición de Kindle.

Question 31

Five Primary Forms of Hedge Fund Regulations

Answer 31

Requirements regarding establishing a hedge fund, including registration, licensing, minimum capital, and waiting periods

Registrations or restrictions on investment advisers and hedge fund managers

Restrictions on distribution and marketing of hedge funds, including which marketing channels may be used (e.g., banks), whether advertising is permitted, and to whom funds may be sold ​

Restrictions on operation of a hedge fund, including leverage, liquidity, risk, reporting, and location of outside service providers

Requirements regarding ongoing reporting

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 32-33). Wiley. Edición de Kindle.

Question 32

How are hedge funds offered for sale to US persons and non US persons

Answer 32

Hedge funds offered to U.S. taxable investors are most commonly established as limited partnerships or limited liability companies organized in the state of Delaware. The favorable characteristics of these entity types include limited liability protection for the fund investors and pass-through of gains and losses for U.S. federal income tax purposes. Hedge funds offered to U.S. tax-exempt investors and non-U.S. investors are most commonly established as exempt companies organized offshore.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 33). Wiley. Edición de Kindle.

Question 33

Soft Dollar Arrangements

Answer 33

A soft dollar arrangement generally refers to an agreement or an understanding by which an investment adviser receives research services from a broker-dealer in exchange for a fee (such as a commission) paid out of the fund or client account.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 33). Wiley. Edición de Kindle.

Question 34

UCITS

Answer 34

Undertakings for Collective Investment in Transferable Securities (UCITS). UCITS are carefully regulated European fund vehicles that allow retail access and marketing of hedge-fund-like investment pools.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 34). Wiley. Edición de Kindle.

Question 35

MiFID

Answer 35

Markets in Financial Instruments Directive (MiFID) is an EU law that establishes uniform regulation for investment managers in the European Economic Area (the EU plus Iceland, Norway, and Liechtenstein).

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 35). Wiley. Edición de Kindle.

Question 36

Dark Pool

Answer 36

A dark pool refers to non-exchange trading by large market participants that is hidden from the view of most market participants.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 35). Wiley. Edición de Kindle.

Question 37

Liquid Alternatives

Answer 37

Liquid alternatives are investment vehicles that offer alternative strategies in a form that provides investors with liquidity through opportunities to sell their positions in a market.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 37). Wiley. Edición de Kindle.

Question 38

Five Types of Liquid Alternative Funds

Answer 38

UNCONSTRAINED CLONES: These liquid funds follow virtually the same strategy as private placement products with underlying liquid assets, such as some hedge funds or managed futures funds.

​CONSTRAINED CLONES: These liquid funds implement a similar strategy as private placement products but are limited in risk exposure by leverage, concentration, or liquidity constraints.

LIQUIDITY-BASED REPLICATION PRODUCTS: These liquid funds are designed to mimic illiquid private placement investments, using liquid securities as proxies.

SKILL-BASED REPLICATION PRODUCTS: These liquid funds are designed to mimic a highly skilled private placement strategy using a simplified and more mechanical strategy.

ABSOLUTE RETURN OR DIVERSIFIED PRODUCTS: These liquid funds are designed to offer absolute returns and/or diversifying returns not directly related to opportunities historically available in private placements and potentially inconsistent with alternative strategies as typically deployed.

Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 37-38). Wiley. Edición de Kindle.