CIM CIM Alternative Investments 2 — Questions and Answers
Question 1: A high-water mark provision in a hedge fund protects investors by:
- Capping the maximum loss in any calendar year
- Ensuring performance fees are only charged on new profits above prior peak NAV (Correct answer)
- Guaranteeing a minimum annual return
- Limiting redemptions during market downturns
Correct 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.
Question 2: Venture capital investments are best described as:
- Debt financing for mature blue-chip corporations
- Equity investments in early-stage, high-growth potential companies (Correct answer)
- Short-selling positions in technology stocks
- Government-guaranteed loans to small businesses
Correct 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.
Question 3: Which of the following best describes a fund of funds structure?
- A single fund that invests directly in real estate properties
- A fund that allocates capital across multiple underlying hedge funds or private equity funds (Correct answer)
- An ETF that tracks a commodity index
- A closed-end fund that trades on a stock exchange
Correct 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.
Question 4: Illiquidity premium in alternative investments compensates investors for:
- Higher regulatory compliance costs
- The inability to quickly convert the investment to cash without significant loss (Correct answer)
- Currency exchange rate risk
- Credit rating downgrades
Correct 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.
Question 5: In the context of hedge fund strategies, a global macro fund primarily makes investment decisions based on:
- Technical chart patterns of individual equities
- Macroeconomic trends, geopolitical events, and policy changes across countries (Correct answer)
- The creditworthiness of specific corporate bond issuers
- Dividend yield ranking of S&P 500 components
Correct 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.
Question 6: Which metric is most commonly used to evaluate the performance of private equity funds?
- Sharpe ratio
- Internal rate of return (IRR) and total value to paid-in capital (TVPI) (Correct answer)
- Beta relative to the S&P 500
- Standard deviation of monthly returns
Correct 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.
CIM CIM Alternative Investments 2
A high-water mark provision in a hedge fund protects investors by: