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EduPristine CFA L I\ Alternative Investment
Alternative Investment
Characteristics
Fund of Funds
Private Equity
Valuation of Real
Estate Investments
Hedge Funds
Commodities
Alternative Investment
Characteristics
Fund of Funds
Private Equity
Valuation of Real
Estate Investments
Hedge Funds
Commodities
Advantages:
Allows to invest in hedge fund with limited capital.
HNI can diversify their investments by taking small exposure to
large number of hedge funds through fund of funds.
Manager will have expertise in selection of large number of good
hedge funds and expertise to do the necessary due diligence.
Drawbacks:
Fund of funds charge mgmt fee in addition to mgmt fees charged
by hedge fund.
Diversification will reduce the investors' risk but at the cost of
returns.
Fund manager may or may not outperform the single hedge fund.
Alternative Investment
Characteristics
Fund of Funds
Private Equity
Venture Capital
Valuation of Real
Estate Investments
Hedge Funds
Development Capital
Commodities
Distressed Investing
Alternative Investment
Characteristics
Fund of Funds
Private Equity
Valuation of Real
Estate Investments
Hedge Funds
Commodities
Valuation Methods
Market or Comparable
Approach
The Valuation of a company
can be a multiple of EBITDA
Asset Based
Most appropriate approach
if company is going to
liquidate
Measured as a companys
assets its liabilities (equal
to shareholders equity)
Asset values can be taken as
market/fair values or
liquidation values
Alternative Investment
Characteristics
Fund of Funds
Private Equity
Valuation of Real
Estate Investments
Hedge Funds
Commodities
Alternative Investment
Characteristics
Fund of Funds
Valuation of Real
Estate Investments
Private Equity
Hedge Funds
Risk
Commodities
Alternative Investment
Characteristics
Fund of Funds
Liquidity
Hedge Funds
Settlement
Errors
Commodities
Risk
Potential for
Mispricing
Investments in esoteric,
infrequently traded securities may
lead to difficulty in determining
the true value.
Valuation of Real
Estate Investments
Private Equity
Counterparty
Credit Risk
Short
Covering
Margin
Calls
Alternative Investment
Characteristics
Fund of Funds
Valuation of Real
Estate Investments
Private Equity
Investment Style
Investment Process
Competitive Advantage
Track Record
Fund Size
Longevity
Management Style
Key-Person Risk
Reputation
Investor Relations
Plans for Growth
Systems Risk Management
Risk
Hedge Funds
Commodities
Alternative Investment
Characteristics
Fund of Funds
Private Equity
Valuation of Real
Estate Investments
Hedge Funds
Commodities
Roll Yield:
Contango Negative Yield Roll
Backwardation Positive Yield Roll
10
Question 1
1. Which of the following is least likely a feature of hedge funds?
a) It is usually open to a limited number of investors who are able to make a large initial
payment
b) It has investments in almost all domains with very few restrictions
c) Investors can withdraw their investment anytime without paying any fee
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Solution 1
Solution: (c) In a hedge fund, the investors are usually asked to keep their money for a
minimum period, known as the lockup period. Also, they may be charged a fee to
redeem shares or make withdrawals before maturity.
12
Question 2
2. An activist shareholder strategy is most likely expected to perform which of the following
functions?
a) Buy shares of a firm at high prices to increase the market value of the stock
b) Buy a large number of the stock to influence companys policies and increase companys
value
c) Buy securities of a distressed firm and sell them later when the situation improves
13
Solution 2
Solution: (b) In an activist shareholder strategy, a large number of shares are bought to
influence the companys policies. The main aim of this is to increase company value.
14
Question 3
3. The treatment of real estate property purchased with a mortgage is the closest to which
of the following?
a) Owners equity is the book value of the property minus the outstanding loan amount
b) Owners equity is the market value of the property minus the outstanding loan amount
c) Owners equity is the market value of the property, and loan is accounted for in liabilities
15
Solution 3
Solution: (b) Property purchased with a mortgage is referred to as leveraged investment.
Owners equity is the property value minus the outstanding loan amount. Thus, changes
in property value over time affect the owners equity.
16
Question 4
4. Which of the following is least likely correct?
a) A hard hurdle rate means that incentive fees are only earned on returns in excess of the
benchmark
b) A 2 and 20 is a hedge fund structure which charges 2% of the value of the assets as
management fee and 20% of the total profits as incentive fee
c) Incentive fee is paid on all gains, irrespective of whether it offset prior losses
17
Solution 4
Solution: (c) In hedge fund, a very common feature is the high water mark. This means that
the incentive fees are only paid to the extent that the current value of an investors
account is above the highest value previously recorded. This ensures that the investors
are not charged twice for the same gain in their portfolio values.
18
Question 5
5. Which of the following statements is most accurate?
a) Index strategy employed by portfolio managers in equities is considered an active
strategy
b) The weightings of various commodities in indexes change with the value of the
derivative positions in the portfolio
c) Index strategy employed by portfolio managers in commodities is considered an active
strategy
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Solution 5
Solution: (c) Index strategy employed by portfolio managers in commodities is considered an
active strategy. Index strategy employed by portfolio managers in equities is considered
a passive strategy. The weightings of various commodities in indexes do not necessarily
change with the value of the derivative positions in the portfolio.
20
Question 6
6. Which of the following is least accurate for Hard Hurdle rate:
a) It ensures that profits are earned only when the returns from the Hedge Fund exceeds
the benchmark rate.
b) It ensures that investors do not pay multiple incentive fees for the same performance.
c) It can be set as a percentage or a rate plus a premium.
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Solution 6
Answer B
Explanation Hard hurdle rate ensures that the Investors pay the incentive fees to Hedge
Fund managers only when they have profits in excess of the benchmark and can be decided
as a percentage or as rate plus premium. High Water Mark is used to ensure an investor
does not pay incentive fees multiple times on the same gains in their investor portfolios.
22
Question 7
7. Which of the following is most likely the measure to downside the risk from Hedge funds
with asymmetric returns:
A) Sortino ratio
B) Sharpe ratio
C) Standard deviation
23
Solution 7
Ans: A) Sortino ratio is based on the downside deviations from the mean and downside the
risk for asset class with asymmetric returns.
24
Question 8
8. Which of the following implications is least correct in the context of Fund of Funds (FOF):
a) It enables investors with limited capital to take advantage of hedge funds.
b) It is not very costly for the Investors.
c) It helps investors in diversifying their investments among different Hedge Fund
strategies.
25
Solution 8
Answer B
Explanation Fund of Funds refers to a company that invests in Hedge Funds thus giving
small investors a chance to invest in Hedge funds while also helping them in diversification of
their Portfolio. It is very costly for an investor as these fund managers charge additional fees
to the one that Hedge funds will charge.
26
Question 9
9. What is the term for financing where debt or preferred shares issued are subordinate to
high yield bonds and carry warrants or conversion features?
a) mezzanine financing
b) venture capital financing
c) vulture capital financing
27
Solution 9
Answer: a)
Mezzanine financing refers to the financing where debt or preferred shares issued are
subordinate to high yield bonds and carry warrants or conversion features.
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EduPristine CFA L I\ Alternative Investment