Reading 60: private capital, real estate, infrastructure, natural resources, and hedge funds

Question 1

In which stage of a firm’s development is a venture capital fund most likely to make its initial investment?
Start-up.
Seed capital.
Angel investing.

Answer 1

Venture capital funds typically make their initial investments during a firm’s seed stage for product development, marketing, and market research. At the angel investing stage, the funding source is usually individuals rather than venture capital funds. The start-up stage or early stage follows the seed stage and refers to investments made to fund initial commercial production and sales. (LOS 60.a)

Question 2

In a secondary sale, a private capital firm sells one of its portfolio companies to:
the public.
a competitor in its industry.
another private capital fund.

Answer 2

In a secondary sale, a private capital firm sells one of its portfolio companies to another private capital fund or group of private investors. Selling a portfolio company to a competitor in its industry is known as a trade sale. Selling a portfolio company to the public requires an initial public offering. (LOS 60.a)

Question 3

Direct commercial real estate ownership least likely requires investing in:
large amounts.
illiquid assets.
a short time horizon.

Answer 3

Commercial real estate ownership requires long-time horizons and purchasing illiquid assets that require large investment amounts.
(LOS 60.c)

Question 4

Compared with purchasing commodities, long positions in commodity derivatives offer the benefit of:
no storage costs.
convenience yield.
better correlation with spot prices.

Answer 4

While commodity futures retain the risk and correlation characteristics of the underlying commodities, the investor does not incur storage costs. Derivatives cannot have higher correlation with spot prices than the commodity itself, as its price is the spot price. Convenience yield is a benefit of owning the actual commodities. (LOS 60.e)

Question 5

Greenfield investments in infrastructure are most accurately described as investments in assets:
that are operating profitably.
that have not yet been constructed.
related to environmental technology.

Answer 5

Greenfield investments refer to infrastructure assets that are yet to be constructed. (LOS 60.d)

Question 6

An investor who chooses a fund-of-funds as an alternative to a single hedge fund is most likely to benefit from:
lower fees.
higher returns.
more due diligence.

Answer 6

A fund-of-funds manager is expected to provide more due diligence and better redemption terms. Funds-of-funds charge an additional layer of fees. Investing in funds-of-funds may provide more diversification, but may not necessarily provide higher returns. (LOS 60.f)

Question 7

Diversification benefits from adding hedge funds to an equity portfolio may be limited because:
correlations tend to increase during periods of financial crisis.
hedge fund returns are less than perfectly correlated with global equities.
hedge funds tend to perform better when global equity prices are declining.

Answer 7

Adding hedge funds to traditional portfolios may not provide the expected diversification to an equity portfolio because return correlations tend to increase during periods of financial crisis. (LOS 60.f)