CFS Alternative Investments 1 — Questions and Answers
Question 1: Which characteristic most distinguishes alternative investments from traditional investments?
- Higher dividend yields
- Low correlation with traditional asset classes (Correct answer)
- Guaranteed principal protection
- Daily liquidity and transparency
Correct answer: Low correlation with traditional asset classes
Alternative investments typically have low correlation with stocks and bonds, making them valuable for diversification.
Question 2: A hedge fund that uses the 'long/short equity' strategy will typically:
- Only buy undervalued stocks and hold them long-term
- Buy stocks expected to rise and short-sell stocks expected to fall (Correct answer)
- Invest exclusively in government bonds
- Track a benchmark index with minimal deviation
Correct answer: Buy stocks expected to rise and short-sell stocks expected to fall
Long/short equity funds take long positions in stocks expected to appreciate and short positions in stocks expected to decline, seeking returns in both directions.
Question 3: Private equity funds differ from public equity primarily because they:
- Offer daily NAV pricing and redemptions
- Invest in companies not listed on public exchanges (Correct answer)
- Are regulated under the Investment Company Act of 1940
- Provide FDIC insurance on invested capital
Correct answer: Invest in companies not listed on public exchanges
Private equity funds invest in companies not traded on public stock exchanges, giving them access to a different universe of investment opportunities.
Question 4: What is the typical 'two and twenty' fee structure in a hedge fund?
- 2% sales load and 20% annual maintenance fee
- 2% management fee on AUM and 20% performance fee on profits (Correct answer)
- 20% upfront fee and 2% redemption fee
- 2% advisory fee and a 20% dividend reinvestment charge
Correct answer: 2% management fee on AUM and 20% performance fee on profits
The '2 and 20' structure means a 2% annual management fee on assets under management plus a 20% incentive fee on profits generated.
Question 5: A 'fund of funds' in the context of alternative investments refers to:
- A mutual fund that invests only in bond funds
- A pooled vehicle that invests in multiple underlying hedge funds or private equity funds (Correct answer)
- An ETF that tracks an index of alternative asset managers
- A closed-end fund with a fixed number of shares
Correct answer: A pooled vehicle that invests in multiple underlying hedge funds or private equity funds
A fund of funds pools investor capital and allocates it across multiple underlying alternative investment funds, providing diversification and professional manager selection.
Question 6: Which investor classification typically permits participation in hedge funds and other private placement offerings under SEC regulations?
- Retail investors with basic brokerage accounts
- Accredited investors meeting income or net worth thresholds (Correct answer)
- All investors with a completed risk tolerance questionnaire
- Only institutional investors such as pension funds
Correct answer: Accredited investors meeting income or net worth thresholds
The SEC defines accredited investors as individuals meeting specific income ($200,000/$300,000 joint) or net worth ($1 million excluding primary residence) thresholds, qualifying them for private offerings.
Question 7: What is a 'lock-up period' in a hedge fund?
- The time required to complete an investor's KYC verification
- A minimum holding period during which investors cannot redeem their capital (Correct answer)
- A period during which the fund manager is prohibited from trading
- The duration required before performance fees are calculated
Correct answer: A minimum holding period during which investors cannot redeem their capital
A lock-up period restricts investors from withdrawing their capital for a specified time, typically 1–2 years, allowing managers to pursue illiquid strategies.
CFS Alternative Investments 1
Which characteristic most distinguishes alternative investments from traditional investments?