AIP Alternative Investments & Derivatives Flashcards

An investment with negative correlation to equities is valuable in a portfolio primarily because it:

Answer: Reduces portfolio volatility by offsetting equity losses during downturns

Assets that move opposite to equities tend to gain value when stocks fall, smoothing overall portfolio performance and reducing drawdowns.

The 'contango' condition in commodity futures markets means that:

Answer: Futures prices are higher than expected spot prices, creating a cost to rolling contracts

In contango, futures prices exceed spot prices, so investors who roll expiring futures contracts forward pay a premium, eroding returns over time.

Which of the following best defines 'venture capital' as an alternative investment?

Answer: Equity financing for early-stage companies with high growth potential

Venture capital involves investing equity in start-up or early-stage companies in exchange for an ownership stake, aiming for substantial returns if the company grows.

The 'delta' of an options contract measures:

Answer: The rate of change of the option's price relative to a $1 move in the underlying asset

Delta indicates how much an option's price is expected to change for every one-dollar movement in the underlying asset's price.

Which alternative investment strategy aims to profit from pricing discrepancies between related securities?

Answer: Arbitrage strategy

Arbitrage strategies exploit temporary mispricings between related instruments — such as a stock and its corresponding futures contract — to generate low-risk profits.

A fund of funds (FOF) in the alternative investment space primarily invests in:

Answer: A diversified portfolio of other hedge funds or private equity funds

A fund of funds allocates its capital across multiple underlying alternative investment funds, providing diversification across managers, strategies, and asset classes.