Chapter 2 - The Environment of Alternative Investments

Question 1

Keyword ‘Bid-ask spread’

Answer 1

Price difference between the highest bid price and the lowest offer.

Question 2

Keyword ‘Buy-side’

Answer 2

Refers to institutions and entities that buy large quantities of securities for the portfolios they manage.

Question 3

Keyword ‘Call markets’

Answer 3

Buyers and sellers trade securities in call markets or continuous markets. Call markets are generally smaller and follow a pattern of price setting, a period of negotiation and negotiated price setting, and a set period of trading.

Question 4

Keyword ‘Churning’

Answer 4

Excessive trading for the purpose of generating commissions.

Question 5

Keyword ‘Commission de Surveillance du Secteur Financier (CSSF)’

Answer 5

Responsible for the financial regulation in Luxembourg. Responsible for the supervision of credit institutions, experts in the financial sector, investment companies, pension funds, regulated securities markets, and their operators, multilateral trading facilities and payment institutions.

Question 6

Keyword ‘Continuous markets’

Answer 6

Buyers and sellers trade securities in call markets or continuous markets. Continuous markets allow continuous trading as long as the market is open. Limit orders by market participants are maintained to buy securities (bid orders at bid prices) and to sell securities (offer orders at ask price).

Question 7

Keyword ‘Dark pool’

Answer 7

Nonexchange trading by large market participants that is hidden from the view of most market participants.

Question 8

Keyword ‘Data providers’

Answer 8

Supply funds primarily with raw data, including security prices, trading information, and indices.

Question 9

Keyword ‘Family office’

Answer 9

Group of investors joined by familial or other ties who manage their personal investments as a single entity, usually hiring professionals to manage money fro members of the office.

Question 10

Keyword ‘Fourth markets’

Answer 10

Electronic exchanges that allow traders to quickly buy and sell exchange0listed stocks via the electronic communications systems offered by these markets.

Question 11

Keyword ‘Management company operating agreement’

Answer 11

Agreement between members related to a limited liability company and the conduct of its business related to the law.

Question 12

Keyword ‘Market making’

Answer 12

Practice whereby an investment bank or other market participant deals securities by regularly offering to buy securities and sell securities. The market maker seeks to receive the bid-ask spread through regularly selling at the ask price and buying at the bid price.

Question 13

Keyword ‘Market orders’

Answer 13

Immediate execution of transaction at best available price.

Question 14

Keyword ‘Market takers’

Answer 14

Buy at ask prices and sell at bid prices, generally paying the bid-ask spread for taking liquidity.

Question 15

Keyword ‘MiFID’

Answer 15

Markets in Financial Instruments Directive is an EU law that establishes uniform regulation for investment managers in the European Economic Area.

Question 16

Keyword ‘Partnership agreement’

Answer 16

Formal written contract creating a partnership.

Question 17

Keyword ‘Platforms’

Answer 17

Systems that provide access to financial markets, portfolio management systems, accounting and reporting systems, and risk management systems.

Question 18

Keyword ‘Primary market’

Answer 18

Refers to the methods, institutions, and mechanisms involved in the placement of new securities to investors.

Question 19

Keyword ‘Private-placement memoranda’

Answer 19

Or offering documents, which are formal descriptions of an investment opportunity that comply with federal securities regulations.

Question 20

Keyword ‘Regulation T margin rule’

Answer 20

Federal Reserve leverage rules that include the Regulation T margin rule that currently requires a deposit of at least 50% of the purchase cost or short sale proceeds of a trade (margin).

Question 21

Keyword ‘Secondary market’

Answer 21

Facilitates trading among investors of previously existing securities.

Question 22

Keyword ‘Section 3(c )1’

Answer 22

HF and other AT pools typically avoid registration through exemptions including Section 3 (c )1 of the company act that limits the number of purchasers to 100 beneficial owners.

Question 23

Keyword ‘Section 3(c )7’

Answer 23

Company act, waives registration if there are no more than 500 super qualified investors.

Question 24

Keyword ‘Sell-side’

Answer 24

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.

Question 25

Keyword ‘Soft dollar arrangements’

Answer 25

Agreement or understanding by which an investment adviser receives research services from a broker-dealer in exchange for a fee (such as commissions) paid out of the fund or client account.

Question 26

Keyword ‘Software’

Answer 26

May consist of prepackaged software programs and computer languages. Some funds use open-source software, and others pay licensing fees for proprietary software.

Question 27

Keyword ‘Subscription agreement’

Answer 27

Application submitted by an investor who desires to join a limited partnership.

Question 28

Keyword ‘Systemic risk’

Answer 28

Potential for economy-wide losses attributable to failures or concerns over potential failures in financial markets, financial institutions, or major participants.

Question 29

Keyword ‘Third markets’

Answer 29

Regional exchanges where stocks listed in primary secondary markets can also be traded. Allow brokers and dealers to set up trades away from an exchange by listing their prices on the NASDAQ intermarket. Third markets are a segment of the OTC market where nonmember investment firms can make markets in and trade securities without going through the exchange.

Question 30

Keyword ‘Universal banking’

Answer 30

Means that banks (especially in Germany) can engage in both commercial and investment banking.

Question 31

What is the term for a private management advisory firm that serves ultra-high net worth investors?

Answer 31

Family office or Family Home office

Question 32

List several advantages of Separately Managed Accounts (SMAs) relative to funds.

Answer 32

SMA investors are the owners on record of the invested assets, SMAs may have objectives that are designed to suit the specific needs of an investor, and SMAs offer transparency to their investors.

Question 33

Which of the following participants is LEAST LIKELY to be classified as an outside service provider: Arbitrageurs, accountants, auditors, or attorneys?

Answer 33

Arbitrageurs

Question 34

Which type of investment adviser may not need to register with the SEC when it has between $25 and $100m in assets under management (AUM) and is subject to registration and examination as an investment adviser at state level?

Answer 34

A mid-sized investment adviser

Question 35

List four ways that a hedge fund manger can increase its use of leverage beyond those established by the Federal Reserve’s Regulation T and NYSE and NASD requirements.

Answer 35

By registering themselves as broker-dealers, by taking derivative positions to obtain synthetic ownership of securities, by using a joint front office account, and by implementing a repurchase (repo) transaction.