Section 5

Question 1

how can fair value be estimated on a liquid market?

Answer 1

Quoted prices from active markets (preferred)

real time prices on a constant basis

Question 2

how can fair value be estimated on illiquid markets

Answer 2

• similar assets that aren’t identical
• assumptions
• Estimates may not be accurate leading to lower valuations thus under-reporting / write downs may occur

Question 3

Under GAAP what are the three levels of judgement introduced in estimating fair value

Answer 3

level 1 / 2 / 3

Question 4

under GAAP what would be level 1 in estimating fair value

Answer 4

uses quoted input prices from active markets and is clearly preferable; it is based on direct observations of identical assets

Question 5

under GAAP what would be level 2 in estimating fair value

Answer 5

uses prices from similar but not identical assets

Question 6

under GAAP what would be level 3 in estimating fair value

Answer 6

uses ‘unobservable’ indirect inputs such as assumptions by market participants - this is sometimes known as mark to management

Question 7

what is the basic idea underpinning the capacity of investment strategies?

Answer 7

cost of implementing a strategy rises with AUM thus performance could be eroded

Question 8

what is capacity of investment strategies particularly true for?

Answer 8

illiquid assets

Question 9

what is threshold capacity in reference to capacity of investment strategies?

Answer 9

the level of AUM that allows the strategy to achieve its stated investment return objective

Question 10

what is wealth maximising capacity in reference to capacity of investment strategies?

Answer 10

the level of AUM that maximises the amount of wealth created, which is defined ass the product of alpha (net of transaction fees) and the AUM

Question 11

what is terminal capacity in reference to capacity of investment strategies?

Answer 11

the level of AUM that reduces the alpha, net of transaction costs, to zero