CAIA CAIA Alternative Investment Vehicles 1 — Questions and Answers
Question 1: What is a Special Purpose Vehicle (SPV) primarily used for in alternative investments?
- To consolidate tax filings across funds
- To isolate assets and liabilities for a specific transaction or investment (Correct answer)
- To register hedge funds with the SEC
- To distribute dividends to retail investors
Correct answer: To isolate assets and liabilities for a specific transaction or investment
An SPV is a legal entity created to isolate financial risk by holding specific assets or liabilities separate from a parent company.
Question 2: Which structure is most commonly used by US-domiciled hedge funds to accommodate tax-exempt domestic investors?
- Offshore feeder fund
- Master-feeder structure
- Limited partnership onshore feeder (Correct answer)
- Business development company
Correct answer: Limited partnership onshore feeder
Tax-exempt US investors (e.g., pension funds) typically invest through an onshore limited partnership feeder to avoid UBTI issues.
Question 3: A Business Development Company (BDC) is required to invest at least what percentage of its assets in qualifying assets?
- 50%
- 60%
- 70% (Correct answer)
- 80%
Correct answer: 70%
Under the Investment Company Act of 1940, BDCs must invest at least 70% of total assets in qualifying assets, primarily private or small public companies.
Question 4: Which of the following best describes a Interval Fund structure?
- A closed-end fund that lists on a stock exchange
- A fund that offers periodic but limited liquidity windows rather than daily redemptions (Correct answer)
- A mutual fund that invests exclusively in interval options
- A hedge fund with a 10-year lock-up period
Correct answer: A fund that offers periodic but limited liquidity windows rather than daily redemptions
Interval funds provide liquidity only at set intervals (e.g., quarterly), making them suitable for holding less liquid alternative assets.
Question 5: In a fund-of-funds structure, the primary benefit to investors is:
- Elimination of management fees
- Diversification across multiple underlying managers (Correct answer)
- Direct ownership of individual securities
- Guaranteed capital preservation
Correct answer: Diversification across multiple underlying managers
Fund-of-funds provide access to multiple managers and strategies, reducing manager-specific risk through diversification.
Question 6: A Real Estate Investment Trust (REIT) must distribute at least what percentage of taxable income to maintain its tax-advantaged status?
- 75%
- 85%
- 90% (Correct answer)
- 95%
Correct answer: 90%
REITs must distribute at least 90% of their taxable income annually to shareholders to qualify for pass-through tax treatment.
CAIA CAIA Alternative Investment Vehicles 1
What is a Special Purpose Vehicle (SPV) primarily used for in alternative investments?