CIM CIM Alternative Investments 1 — Questions and Answers
Question 1: Which characteristic most distinguishes alternative investments from traditional asset classes?
- Low correlation with public equities and bonds (Correct answer)
- Guaranteed principal protection
- Daily liquidity and transparent pricing
- Regulated by the SEC as mutual funds
Correct answer: Low correlation with public equities and bonds
Alternative investments typically exhibit low correlation with traditional asset classes, making them valuable for portfolio diversification.
Question 2: A hedge fund employing a long/short equity strategy aims to profit by:
- Investing only in government bonds
- Buying undervalued stocks and short-selling overvalued stocks simultaneously (Correct answer)
- Tracking a benchmark index with minimal tracking error
- Holding cash equivalents during market volatility
Correct answer: Buying undervalued stocks and short-selling overvalued stocks simultaneously
Long/short equity strategies seek alpha by taking long positions in undervalued securities and short positions in overvalued ones.
Question 3: Private equity buyout funds primarily create value by:
- Trading public equities on margin
- Acquiring companies, improving operations, and selling at a profit (Correct answer)
- Investing in government-backed mortgage securities
- Providing short-term bridge loans to municipalities
Correct answer: Acquiring companies, improving operations, and selling at a profit
Buyout funds acquire companies using leverage and operational improvements to increase value before exiting through a sale or IPO.
Question 4: The J-curve effect in private equity refers to:
- Exponential return growth in the fund's early years
- Initial negative returns followed by positive returns as investments mature (Correct answer)
- A rapid decline in fund value due to early distributions
- Rising management fees over the fund's life
Correct answer: Initial negative returns followed by positive returns as investments mature
The J-curve describes the pattern where early fees and capital calls produce negative returns before investments mature and generate positive gains.
Question 5: Real assets as an alternative investment class include which of the following?
- Corporate convertible bonds
- Infrastructure, commodities, and timberland (Correct answer)
- Money market instruments
- Exchange-traded index funds
Correct answer: Infrastructure, commodities, and timberland
Real assets encompass physical or tangible assets such as infrastructure, commodities, real estate, and natural resources.
Question 6: Which fee structure is most common among hedge funds?
- 0.5% management fee, no performance fee
- 1% management fee, 5% performance fee
- 2% management fee, 20% performance fee (Correct answer)
- No management fee, 30% performance fee
Correct answer: 2% management fee, 20% performance fee
The '2 and 20' structure — 2% annual management fee and 20% of profits — is the traditional hedge fund fee model.
CIM CIM Alternative Investments 1
Which characteristic most distinguishes alternative investments from traditional asset classes?