CIM Alternative Investments Flashcards

A high-water mark provision in a hedge fund protects investors by:

Answer: Ensuring performance fees are only charged on new profits above prior peak NAV

A high-water mark ensures the manager earns performance fees only after recovering prior losses and surpassing the previous net asset value peak.

Venture capital investments are best described as:

Answer: Equity investments in early-stage, high-growth potential companies

Venture capital provides equity funding to startups and early-stage companies with high growth potential in exchange for an ownership stake.

Which of the following best describes a fund of funds structure?

Answer: A fund that allocates capital across multiple underlying hedge funds or private equity funds

A fund of funds invests in a diversified portfolio of other funds, providing broader exposure but adding an additional layer of fees.

Illiquidity premium in alternative investments compensates investors for:

Answer: The inability to quickly convert the investment to cash without significant loss

Investors demand an illiquidity premium as additional expected return for accepting that they cannot easily exit the investment when desired.

In the context of hedge fund strategies, a global macro fund primarily makes investment decisions based on:

Answer: Macroeconomic trends, geopolitical events, and policy changes across countries

Global macro funds take large directional positions in currencies, interest rates, equities, and commodities based on macroeconomic analysis.

Which metric is most commonly used to evaluate the performance of private equity funds?

Answer: Internal rate of return (IRR) and total value to paid-in capital (TVPI)

Private equity performance is measured by IRR (time-weighted profitability) and TVPI (total value returned relative to capital invested), since NAV-based metrics are impractical.