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CAIA II > Topic 2: Universal Investment Considerations > Flashcards

Topic 2: Universal Investment Considerations Flashcards

1
Q

Of the following U.S. federal statutes, which one provides registration and regulation of persons and entities who are engaged in providing advice to others?

The Securities Act of 1933
The Securities Exchange Act of 1934
The Investment Advisers Act of 1940
The Investment Company Act of 1940

A

The Investment Advisers Act of 1940

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2
Q

For what purpose was the Dodd-Frank Act enacted

A

Improve financial stability of the U.S. by
- improving accountability
- transparency in the financial system
- to end “too big to fail”
- to protect the American taxpayer by ending bailouts
- to protect consumers from abusive financial services practices, and for other purposes

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3
Q

Regulator for derivatives in the US

A

Commodity Futures Trading Commission (CFTC)

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4
Q

In the United States, a firm manages a hedge fund with $50 million in assets under management and operates in a state that does not require the registration of investment advisers. Is national registration still required, and who is the firm’s regulator?

A

Yes; SEC

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5
Q

IPO vs ICO

A
  • shares of a company for the first time
  • ownership of an asset as tracked through a coin or a digital token.
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6
Q

Each European country has its own scheme for regulation and compliance. Therefore, an alternative investment manager must comply with the individual regulatory bodies in each country. Under what circumstance would there be an exception to this rule?

A

If a manager seeks to conduct business within the European Union, they are subject to a single regulatory scheme, as long as the manager is domiciled in one of its member states.

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7
Q

Undertakings for Collective Investments in Transferable Securities (UCITS)

vs

Alternative Investment Funds (AIFs)

A
  1. RETAIL: UCITS are generally for retail investors with small investment amounts while AIFs are for investors with higher investments
  2. INVESTMENTS: UCITS are restricted to safe and liquid assets while AIFs have fewer investment restrictions
  3. LEVERAGE: UCITS limit leverage while AIFs can use reasonable levels of leverage
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8
Q

Two methods available to fund managers to engage in the marketing of AIFs by AIFMs

A
  1. Using a marketing passport available under the AIFMD
  2. Marketing in a specific EU member country in accordance with that country’s private placement regime
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9
Q

What is entailed within asset stripping rules and how long do the rules apply after acquiring control of a non-listed company?

A

Prevent them from:
- making a controlling investment
- take a loan
- distribution loan proceeds themselves

2 years

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10
Q

Duties of the Securities and Futures Ordinance (SFO) and the Securities and Futures Commission (SFC) in Hong Kong.

A

SFO: asset management activity in Hong Kong.

SFC: regulator responsible for overseeing the SFO in Hong Kong.

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11
Q

Under which three situations would a fund manager not be required to obtain a capital markets services (CMS) license in Singapore?

A
  1. Not more than 30 qualified investors (not more than 15 are funds and LPs)
  2. Value does not exceed specified amount
  3. Registered with MAS as RFMC
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12
Q

Describe the role of the Financial Supervisory Service (FSS) in South Korea

A

Responsible for inspection of financial institutions as well as enforcement of relevant regulations as directed by the FSC.

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13
Q

Describe the level of regulation for marketing of fund interests in Japan.

A

Heavily regulated

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14
Q

Define Sustainability

A

Meets the needs of the present without compromising the needs of future generation

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15
Q

Define Social License Principle

A

We rely on a convenient from society to pursue financial goals

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16
Q

Define Principal vs Agent

A

BO; handling on behalf of

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17
Q

Define Value Chain

A

Chain of intermediaries that create value for each client and in aggregate for the system

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18
Q

Public vs Private Interest theory of regulation

A

Public: Act through govt for benefit of society and seek to prevent problems that come with the free markets (imperfect competition, environmental damage etc.)

Private: Self interested motivations

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19
Q

SEC / FINRA / CFTC / NFA

A

SEC: Protects investors, fair markets, capital formation

FINRA: regulates broker/dealers

CFTC: regulates derivatives

NFA: regulates Futures

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20
Q

Securities Act 1933

Exchange Act 1934

Advisers Act 1940

Investment Company (40 Act)

A

Securities Act 1933: registration of securities

Exchange Act 1934: transactions in secondary market + broker/dealer

Advisers Act 1940: advisers

Investment Company (40 Act): mutual funds

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21
Q

2 Tests for the Private Investment Fund exemption under US

A
  1. no more than 100 bene owners
  2. no public offering
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22
Q

Europe AIFMD exemptions
1. TYPE:
2. Min. AUM Threshold:

A

Europe AIFMD exemptions
1. TYPE: Family offices which no external capital, pension, employee scheme
2. Min. AUM Threshold: Less than EUR 100m OR less than EUR 500m unleveraged, no redemption rights for 5 years. Smaller funds without full AIFMD registration will not be entitled to marketing passport

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23
Q

SFO vs SFC in HK

A

Ordinace: legislator
Commission: regulator

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24
Q

HK rules:

Funds offered on a private placement basis or unsolicited basis do not need to be authorized by the SFC in the case in which all four of the following conditions are met:

  1. # of investors
  2. min. subscription amount
  3. max offering of share value
  4. status of investor
A
  1. # of investors: no more than 50
  2. min. subscription amount: more than HKD 500k
  3. max offering of share value: HKD 5m
  4. status of investor: professional
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25
Q

SG Rules:

Does not require CMS license if:
1. # of investors:
2. AUM:
3. status of Fund Management Company

A
  1. no more than 30 qualified investors, not more than 15 are funds or LPs
  2. Value does not exceed specific amount set out in regulations, e.g. SGD 250m
  3. Registered as RFMC
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26
Q

Define Qualified Opportunity Zones

A

Areas designated for special income tax breaks for investors funding PE or real estate projects

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27
Q

Define Qualified Purchaser
1. natural person with at least…
2. insti investor with at least…
3. entity where each BO is a qualified purchaser

A

Define Qualified Purchaser
1. natural person with at least USD 5m
2. insti investor with at least USD 25m
3. entity where each BO is a qualified purchaser

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28
Q

3 types of SEC exams:

A

3 types of SEC exams:
1. periodic
2. cause: tips or complaints
3. sweep: risk across multiple firms

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29
Q

Section 13(d) of Exchange Act

A

Adviser who owns more than 5% of publicly traded voting equity securities have to file disclosure

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30
Q

Form PF

A

Private funds exceeding USD 150m have to file info about the fund: size, leverage, investor type and concentration, performance etc.

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31
Q

What are some of the potential motivations for ESG adoption amongst institutional investors?

A
  1. Increasing risk-adjusted returns
  2. Reducing reputational risk
  3. Address stakeholder concerns
  4. Doing the right thing or improving the planet
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32
Q

List some of the challenges faced by institutional investors regarding ESG.

A

ESG Adoption
Lack of Standards
Cost

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33
Q

Explain some considerations an ESG investor might have when allocating to commodity derivatives.

A

The presence of non-commercial (or speculative) investors can lead to increased price volatility. This can be problematic for food-related products, especially for poor economies that rely heavily on agriculture.

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34
Q

Investors can access commodities through derivatives or through physical ownership. Why might ESG investors avoid buying physical commodities?

A

Buying physical commodities with limited supply can have a large impact on the demand for that commodity and more directly impact the price/volatility.

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35
Q

Why might environmental stewardship be such a large consideration for an ESG investor in real estate?

A

Buildings and construction activity account for 36% of global final energy use and are responsible for 39% of global carbon emissions. Both also can create significant amounts of waste.

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36
Q

What are some of the key rationales behind ESG adoption amongst hedge fund managers?

A

Regulation
Risk management
Client demand
New potential sources of alpha.

37
Q

Regarding hedge fund governance and transparency, describe the rationale behind the Open Protocol Hedge Fund Reporting and describe its framework.

A

WHY: created to bridge investors’ needs for risk and portfolio metrics and the need of hedge funds to maintain some level of privacy around detailed data.

WHAT: provides a standard and consistent framework around data and inputs, calculations and methods, timely and regular report, and protocols and standards.

38
Q

Describe the arguments for and against hedge fund managers implementing short selling as part of their process

A

FOR: make markets more efficient, lowers potential for over-priced securities, punishes corp fraud or mismanagement

AGAINST: makes prices more volatile, hope for price decline is which harmful to market sentiment

39
Q

How might an activist hedge fund manager fit into an ESG framework?

A

Pressure government to take a more positive position when working with employees, customers, communities

40
Q

How does ESG adoption in private equity differ from other alternative investments?

A
  • PE firms can require portfolio companies to make certain commitments that comply with shared ESG objectives.
  • Longer horizon ESG goals and objectives
41
Q

What is the constraint framework?

A
  1. materiality: can be observed
  2. social psychology: as a whole, not personalised
  3. diagnosticity: must be concrete and iterative
42
Q

What is fundamental attribution error?

A

Individual’s tendency to attribute another’s actions to their character or personality, while attributing their behavior to external situational factors outside of their control.

43
Q

Hegemon

A

Singular world power able to exert influence over most of the world

44
Q

Washington-Consensus

A

Policies that came out of the Reagan-Thatcher revolution - independent central bank, deregulation, privatisation, countercyclical fiscal policy, free trade

45
Q

Dirigisme

A

State control

46
Q

Populism

A
  • positive nominal growth in ST
  • massive inefficiencies LT
  • higher inflation and lower growth
47
Q

Multipolar disequilibrium

A

Outcomes most uncertain and greatest disequilirbium. Macro and investment volatility due to increasing number of Great Power conflicts and proxy warfare

48
Q

Open Protocol

A

Consistent and Standard Framework:
- data
- method
- reporting
- standards

49
Q

Materiality

A

Topics that reflect the org’s economic, environmental and social impacts, or influencing decisions of stakeholders

50
Q

6 KPMG framework to assess materiality

A
  1. identify
  2. assess
  3. implement
  4. monitor and measure
  5. assure and report
  6. evaluate
51
Q

6 UN Principles for Responsible Investment

A
  1. We will incorporate ESG issues into investment ANALYSIS and decision-making processes.
  2. We will be ACTIVE OWNERS and incorporate ESG issues into our ownership policies & practices.
  3. We will seek APPROPRIATE DISCLOSURE on ESG issues by the entities in which we invest.
  4. We will promote ACCEPTANCE and implementation of the Principles within the investment industry.
  5. We will work together to ENHANCE our effectiveness in implementing the Principles.
  6. We will each REPORT on our activities and progress towards implementing the Principles.
52
Q

Describe the goals of the Global Reporting Initiative (GRI) and the Global Reporting Initiative Standards

A

GRI seeks to help BIZ and GOVT understand and communicate impact on critical sustainability issues.

GRI Standards:
- org report their ESG impacts
- reference for policy makers and regulators

53
Q

ESG Advocates vs maximising shareholder return

A

Equitable distribution of returns amongst stakeholders, not just shareholder

54
Q

Positive vs Negative Screening

A

Negative: Excludes sin stocks

Positive: look for company that are exemplary on one or more ESG issue

55
Q

Engagement Strategy vs Passive Proxy Voting

A

Engagement: takes a long position then engage in dialogue with specific agenda to improve ESG standing, e.g. diversify, exec comp, improve disclosure

Passive Proxy: Proxy voting deals with issues specifically put for election by management and does not go beyond the agenda of management.

56
Q

Mission-related impact investing vs Program-related investing

A

Program has sub competitive risk adjusted return

Primary goal is one of the exempt purpose, NOT income or appreciation, NOR legislation

56
Q

The three elements of Impact Investing according to GIIN

A
  1. Intentionality: contribute to ESG, which differentiates from ESG investing
  2. Financial Return: seeks financial return, thus different from philanthropy
  3. Impact management: committed to measure and report
57
Q

Reasons FOR and AGAINST for ESG

A

FOR:
1. Historical returns appear to be equally attractive to non ESG (not losing out)
2. Duty to protect from effects of non-ESG e.g. litigation, penalties, rep risk etc.
3. Contribute to a better world, where the investors can also enjoy its non-cash benefits

AGAINST
1. Returns based on multi-factor method appear to be only equally attractive
2. In the absence of ESG directive, asset managers are required to invest solely to benefit client financially
3. Lower discount rate, redirecting wealth to their own personally-favoured causes

58
Q

What are the 5 ESG categories on the SASB Materiality Map?

A
  1. Environment
  2. Social Capital
  3. Human Capital
  4. business model and innovation
  5. Leadership and Governance
59
Q

Purpose of the UN’s 17 SDGs?

A
  • improve plight of human race
  • improve income, living conditions
    reduce poverty and inequality
  • stall or delay climate change
60
Q

US vs Europe vs Asia regulatory attitudes and implementation

A

In the United States, the U.S. Department of Labor stated that fiduciaries may consider ESG issues while investing, but only if those issues are directly relevant to the return, risk, and economic outlook of each investment. In other words, financial risk and return comes first, ESG issues second.

European regulation is increasingly supporting mandatory disclosure of ESG-related issues, but regulation beyond that is somewhat unclear.

In Asia, there are also few requirements. Hong Kong is slightly ahead of other Asian countries, in that the Securities and Futures Commission announced The Hong Kong Strategic Framework for Green Finance in 2018.

61
Q

Discuss the Coase theorem in the context of shareholders and victims of negative externalities.

A

Coase asserts that whether the law sides with shareholders who claim a right to generate negative externalities or with the victims of negative externalities will not interfere with the ability of the parties to negotiate the most efficient resolution to the dispute so that they can share in the net benefits (or least costs).

62
Q

In an investment committee meeting, a portfolio manager proposes that the firm consider ESG issues when conducting investment decisions.

She makes two cases for special consideration of ESG issues:

1) MITIGATES RISK: investment managers have a duty to protect shareholders from ESG-related risks such as litigation or penalties

2) DOING GOOD: investment managers who have higher allocations to ESG-compatible investments contribute to a better world

What is the third primary justification for special consideration of ESG issues?

A

PERFORMANCE: historic total returns from portfolios of listed securities based on ESG concerns and adjusted for risk based on single-market-factor methods appear to be equally attractive, and perhaps in some cases or jurisdictions more attractive, than portfolios that ignore or eschew ESG concerns.

63
Q

What are the characteristics of asset owner?

A
  1. Work for bene
  2. Work with sponsoring entity
  3. Work within explicit law / societal license
  4. Deliver misson specific outcomes (e.g. payments or benefits)
  5. use business models
64
Q

what is the purpose of the investment industry

A
  • contribute to society
  • increasing societal wealth and well-being
  • other purpose: intrinsic, core, collateral
65
Q

What are the four areas of fiduciary oblications

A
  1. loyalty
  2. prudence and care
  3. diversification
  4. impartiality
66
Q

Explain the concept of putting the client first as a way of operating with a true fiduciary and professional mindset.

A
  • know your client and amke decisions to serve this need
  • purpose driven
67
Q

What is the point underlying the “triple bottom line”

A

profit people plant

focus not only on economic value but also on environmental and social value

68
Q

What are the US SEC’s resposibilities

A
  1. protect investors
  2. maintain, fair, orderly and efficient markets
  3. faciliate capital formation
69
Q

Main objectives (3) of the European Banking Authority

A

safeguard banking sector’s
1. integrity
2. efficiency
3. orderly functioning

70
Q

what does UCITS stand for

A

Undertaking for
Collective
Investment in
Transferable
Securities

71
Q

What are the broad benefits of AIFMD

A
  • provides common regulations across EU member states
  • simplifies framework which reduces admin/op costs
  • investors are given protection
72
Q

Hedge fund in HK on a private placement basis and not authorised by SFC must satisfy which 4 conditions

A
  1. offer made not more than 50 persons
  2. min. sub of HKD 500k
  3. max offering of HKD 5m
  4. professional investors
73
Q

Mistakes that investors make when it comes to geopolitical factors on asset prices

A

linear extrapolation, assuming that current events will be long term trends

thinking that issues are binary

using historical analogies incorrectly

74
Q

3 political starting systems

A

Laissez-faire
Dirigisme
Populism

75
Q

Name three ideas in which investors can focus on to make LONG TERM forecasts and generate geopolitical beta

A
  1. What is unsustainable will end
  2. Scarcity will lead to innovation; hubris to downfall
  3. complex systems: e.g. whats next?
76
Q

How can ESG materiality be measured?

A

Materiality = Likelihood x Expected financial loss

77
Q

If interested in ESG activities, what should a PE firm do

A
  1. formal committment to ESG integration
  2. set objectives and metrics
  3. engage and communicate with stakeholder s
78
Q

State the 4 goals for incorporating ESG principles into portfolios

A
  1. increase risk-adjusted returns
  2. redue rep rik
  3. address stakeholder concerns
  4. do the right thign
79
Q

Risks and related disclosures of leverage

A
  1. conditions under which leverage may be used
  2. increased risk due to leverage e.g. cp risk
  3. restrictions and sources of leverage
  4. how is leverage defined / measured
  5. leverage’s match/mismatch to maturity
80
Q

What are the considerations for ESG investor of commods futures

A
  1. dont take delivery - may disrupt supply chain and distort price
  2. trade only the liquid contracts so not to increase price vol
  3. HF would disclose holdings
  4. Limit investments in agri contracts due to impact of vol on poorer countries
81
Q

3 Organizations that provide guidance with respect to ESG investing:

A

Global Reporting Initiative
Sustainability Accounting Standards Board (SASB)
Task Force on Climate-Related Financial Disclosures (TCFD)

82
Q

Function of the US Adviser Act

A
  • To provide for registration and regulation by the SEC of those who
  • advise others regarding securities investments (1pt), and it
  • defines the role and responsibilities of an investment adviser (0.5pts).
83
Q

Investment advisers of private funds in the U.S. are generally not required to register with the SEC if AUM is under

A

USD 25m

84
Q

Hedge funds do not need to register with SEC if they have no managed accounts and AUM is under

A

USD 150m

85
Q

Under rule 506, private fund can have ____ AI, ____ non-AI and what restriction?

A

Unlimited AI
Max 35 Non-AI
Not engaged in general solicitation and advertising

86
Q

What body is responsible for macro-prudential oversight of the EU’s financial system?

Which authority is the EU’s securities markets regulator, contributing to safeguarding the stability of its financial system?

A

European Systemic Risk Board (ESRB)
European Securities and Markets Authority (ESMA)

87
Q

According to AIFMD, what should be included in the annual report

A
  1. balance sheet
  2. income statement
  3. material changes
  4. remuneration disclosures
88
Q

What are the 3 criteria that AIFs must meet for the AIFM to be considered “small” and thus exempt from AIFMD.

A
  1. AUM < EUR 500m
  2. unleveraged
  3. redemption cannot be within first 5 years

CAIA II (9 decks)

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